QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

OR

¨

TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934

From the transition period from to .

Commission File Number 001-35798

KALOBIOS
PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

Delaware

77-0557236

(State or other jurisdiction

of incorporation)

(IRS Employer

Identification No.)

260 East Grand Avenue, South San Francisco, CA

94080

(Address of principal executive offices)

(Zip Code)

Registrants telephone number, including area code: (650) 243-3100

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:

Large accelerated filer

¨

Accelerated filer

¨

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No x

As of May 3, 2013, there were 24,177,506 shares of common stock of the issuer outstanding.

Convertible preferred stock, $0.001 par value: no shares and 60,152,555 shares authorized at March 31, 2013, and
December 31, 2012, respectively; no shares and 12,329,330 shares issued and outstanding at March 31, 2013, and December 31, 2012, respectively; aggregate liquidation preference of $105,512 at December 31, 2012



102,023

Stockholders equity (deficit):

Common stock, $0.001 par value: 80,000,000 shares authorized at March 31, 2013, and December 31, 2012, respectively;
24,147,815 and 2,186,695 shares issued and outstanding at March 31, 2013, and December 31, 2012, respectively

KaloBios Pharmaceuticals, Inc. (the Company) is a biopharmaceutical company whose primary business is to develop
monoclonal antibody therapeutics for diseases that represent a significant burden to society and to patients and their families. The Companys primary clinical focus is on respiratory diseases and cancer. All of the Companys assets are
located in California.

The Company has incurred significant losses and had an accumulated deficit of $106.8 million as of
March 31, 2013. The Company has financed its operations primarily through the sale of equity securities, debt financing, grants and the payments received under its agreements with Novartis Pharma AG (Novartis) and Sanofi Pasteur S.A. (Sanofi).
To date, none of the Companys product candidates have been approved for sale and therefore the Company has not generated any revenue from product sales. Management expects operating losses to continue for the foreseeable future. As a result,
the Company will continue to seek additional capital through equity offerings, debt financing and/or payments under new or existing licensing or collaboration agreements. If sufficient funds on acceptable terms are not available when needed, the
Company could be required to significantly reduce its operating expenses and delay, reduce the scope of, or eliminate one or more of its development programs.

Initial Public Offering

The Company closed its initial public offering
(IPO) in February 2013, selling 8,750,000 shares of common stock. The IPO price was $8.00 per share. As a result of the IPO, the Company received gross proceeds of approximately $70.0 million, which resulted in net proceeds to the Company of
approximately $61.5 million, after underwriting and other expenses of approximately $8.5 million (comprising of $4.9 million in underwriting discounts and commissions and $3.6 million in other offering expenses). In addition, in connection with the
completion of the Companys IPO, all outstanding convertible preferred stock converted into 13,211,120 shares of common stock.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and include all adjustments necessary (consisting of
normal recurring adjustments) for the presentation of our consolidated financial position, comprehensive loss and cash flows for the periods presented. The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiaries.

The financial information filed is unaudited. The December 31, 2012 Condensed Consolidated Balance Sheet
was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for interim periods are not necessarily indicative of the results for the entire year or any other interim period. The Condensed
Consolidated Financial Statements should be read in conjunction with the Companys financial statements and the notes thereto included in the Companys annual report on Form 10-K for the year ended December 31, 2012 filed with the
Securities and Exchange Commission, or SEC, on March 29, 2013.

Reverse Stock Split

In December 2012, the Companys board of directors approved a 1-for-3.56147 reverse split of the Companys issued and
outstanding capital stock which became effective on January 15, 2013. Upon the effectiveness of the reverse stock split, (i) every 3.56147 shares of issued and outstanding common stock and preferred stock was decreased to one share of
common stock or preferred stock, as applicable, (ii) the number of shares of common stock into which each outstanding option to purchase common stock is exercisable was proportionally decreased on a 1-for-3.56147 basis and the number of shares
of preferred stock into which each

outstanding warrant is exercisable was proportionally decreased on a 1-for-3.56147 basis and, (iii) the exercise price of each outstanding option to purchase common stock and warrant to
purchase preferred stock was proportionately increased. All of the share numbers, share prices, exercise prices and other per share information throughout these financial statements have been adjusted, on a retroactive basis, to reflect this
1-for-3.56147 reverse stock split.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and
accompanying notes. Actual results could differ materially from those estimates. The Company believes judgment is involved in determining revenue recognition, the fair value-based measurement of stock-based compensation, accruals and warrant
valuations. The Company evaluates estimates and assumptions as facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ from these estimates and assumptions, and those
differences could be material to the consolidated financial statements.

Concentration of Credit Risk

Cash, cash equivalents, and marketable securities consist of financial instruments that potentially subject the Company to a concentration
of credit risk in the event of a default by the related financial institution holding the securities, to the extent of the value recorded in the balance sheet. The Company invests cash that is not required for immediate operating needs primarily in
highly liquid instruments with lower credit risk. The Company has established guidelines relating to the quality, diversification, and maturities of securities to enable the Company to manage its credit risk.

Cash, Cash Equivalents, and Marketable Securities

The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. The Companys cash equivalents and marketable
securities are available for use in order the meet the Companys liquidity needs within the next year and so are classified as short-term and available for sale (see Note 3). Securities available for sale are carried at estimated fair
value, with unrealized gains and losses reported as part of accumulated other comprehensive income (loss), a separate component of stockholders equity. The Company has estimated the fair value amounts by using available market information. The
cost of available-for-sale securities sold is based on the specific-identification method.

Deferred Offering Costs

Deferred offering costs as of December 31, 2012, consisting of legal, accounting, printing and filing fees incurred in the
preparation of the Companys Registration Statements on Form 10-12G and Form S-1 as part of the Companys IPO process were capitalized. As of December 31, 2012, the Company had capitalized $2.8 million of deferred offering
costs on the consolidated balance sheets. The deferred offering costs were offset against the IPO proceeds upon the completion of the offering in February 2013.

Convertible Preferred Stock Warrant Liabilities

Prior to the
Companys IPO, outstanding warrants to purchase shares of the Companys Series B-2 and Series E preferred stock were classified as other liabilities. The initial liability recorded was adjusted for changes in the fair values of the
Companys preferred stock warrants during each reporting period and was recorded as a component of other income (expense) in the statement of operations for that period.

Upon the closing of the Companys IPO and the conversion of the underlying preferred stock to common stock, the Companys warrants to purchase shares of Series B-2 preferred stock were converted
into warrants to purchase shares of the Companys common stock. The aggregate fair value of these warrants upon the closing of the IPO was $157,000 which was reclassified from liabilities to additional paid-in capital, a component of
stockholders equity (deficit), and the Company ceased recording any further related periodic fair value adjustments. The Company estimated the fair values of these warrants using the Black-Scholes option-pricing model, based on the inputs for
the estimated

fair value of the underlying convertible preferred stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates, expected dividend rates and
expected volatility of the price of the underlying convertible preferred stock. These estimates were based on subjective assumptions.

The warrant to purchase shares of the Companys Series E preferred stock expired upon the closing of the Companys IPO in February 2013.

Research and Development Expenses

Development costs incurred in the
research and development of new products are expensed as incurred, including expenses that may or may not be reimbursed under research and development collaboration agreements. Research and development costs include, but are not limited to,
salaries, benefits, stock-based compensation, laboratory supplies, allocated overhead, fees for professional service providers and costs associated with product development efforts, including preclinical studies and clinical trials. Research and
development expenses under collaborative agreements approximate or exceed the revenue recognized under such agreements.

The
Company estimates preclinical study and clinical trial expenses based on the services performed, pursuant to contracts with research institutions and clinical research organizations that conduct and manage preclinical studies and clinical trials on
its behalf. In accruing service fees, the Company estimates the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort
varies from the estimate, the Company will adjust the accrual accordingly. Payments made to third parties under these arrangements in advance of the receipt of the related services are recorded as prepaid expenses until the services are rendered.

Revenue Recognition

The Company recognizes revenue when: (i) persuasive evidence of an arrangement exists, (ii) transfer of technology has been completed, delivery has occurred or services have been rendered,
(iii) the fee is fixed or determinable, and (iv) collectibility is reasonably assured. Payments received in advance of work performed are recorded as deferred revenue and recognized when earned. All revenue recognized to date under the
Companys collaborative agreements has been nonrefundable.

Multiple Element Arrangements

The Company evaluates revenue from agreements that have multiple elements to determine whether the components of the arrangement represent
separate units of accounting. Management considers whether components of an arrangement represent separate units of accounting based upon whether certain criteria are met, including whether the delivered element has stand-alone value to the
customer. To date, all of the Companys research and development collaboration and license agreements have been assessed to have one unit of accounting. Up-front and license fees received for a combined unit of accounting are deferred and
recognized ratably over the projected performance period. Nonrefundable fees where the Company has no continuing performance obligations are recognized as revenue when collection is reasonably assured and all other revenue recognition criteria have
been met.

Research and Development Services

Internal and external research and development costs incurred in connection with collaboration agreements are recognized as revenue in the same period as the costs are incurred and are presented on a
gross basis because the Company acts as a principal, has the discretion to choose suppliers, bears credit risk, and performs at least part of the services.

The Company has adopted the milestone method. Under the milestone method, contingent consideration received from the achievement of a
substantive milestone will be recognized in its entirety in the period in which the milestone is achieved. A milestone is defined as an event having all of the following characteristics: (i) there is substantive uncertainty at the date the
arrangement is entered into that the event will be achieved; (ii) the event can only be achieved; based in whole or in part on either the companys performance or a specific outcome resulting from the companys performance; and
(iii) if achieved, the event would result in additional payments being due to the company.

The Companys future
research and development and license agreements may provide for payments to be paid to the Company upon the achievement of development milestones or success fees. Given the challenges inherent in developing biologic products, there may be
substantial uncertainty as to whether any such milestones would be achieved at the time the agreements are executed. In addition, the Company will evaluate whether the development milestones meet all of the conditions to be considered substantive.
The conditions include: (1) the consideration is commensurate with either of the following: (a) the vendors performance to achieve the milestone or (b) the enhancement of the value of the delivered item or items as a result of a
specific outcome resulting from the vendors performance to achieve the milestone; (2) it relates solely to past performance; and (3) it is reasonable relative to all the deliverables and payment terms within the arrangement. If the
Company considers the development milestones to be substantive, revenue related to such future milestone payments will be recognized as the Company achieves each milestone. The election to adopt the milestone method did not impact the Companys
financial position or results of operations as of and for the year ended December 31, 2012, or the three month period ended March 31, 2013, as the Company did not receive any milestone payments in those periods, and no milestones payments,
as defined, are included in any of the Companys existing collaboration agreements as of March 31, 2013.

Stock-Based
Compensation Expense

The Company measures employee and director stock-based compensation expense for stock awards at the
grant date, based on the fair value-based measurement of the award, and the expense is recorded over the related service period, generally the vesting period, net of estimated forfeitures. The Company calculates the fair value-based measurement of
stock options using the Black-Scholes valuation model and the single-option method and recognizes expense using the straight-line attribution approach.

The Company accounts for equity instruments issued to nonemployees based on their fair values on the measurement dates using the Black-Scholes option-pricing model. The fair values of the options granted
to nonemployees are remeasured as they vest. As a result, the noncash charge to operations for nonemployee options with vesting is affected each reporting period by changes in the fair value of the Companys common stock.

Comprehensive Loss

Comprehensive loss includes the net loss and all changes in stockholders deficit during a period, except for those changes resulting
from investments by stockholders or distributions to stockholders. Other comprehensive income (loss) consists solely of unrealized gains (losses) on marketable securities.

Net Loss Per Common Share

Basic net loss per common share is calculated by
dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share is computed by dividing the net loss by the weighted-average
number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included in the calculation of diluted net loss per common share when their effect is dilutive.

The Companys potential dilutive securities which include convertible preferred stock,
unvested restricted stock, stock options, and warrants have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share and be antidilutive. Therefore, the denominator used to calculate
both basic and diluted net loss per common share is the same in all periods presented.

The following shares of outstanding
potentially dilutive securities have been excluded from the computations of diluted net loss per common share as the effect of including such securities would be antidilutive:

As of March 31,

2013

2012

Convertible preferred stock



10,657,072

Warrants to purchase common stock

38,997

72,792

Warrants to purchase preferred stock



38,997

Options to purchase common stock

1,050,061

964,123

1,089,058

11,732,984

3. Investments

At March 31, 2013, the amortized cost and fair value of investments, with gross unrealized gains, were as follows:

At December 31, 2012, the amortized cost and fair value of investments, with gross
unrealized gains, were as follows:

(in thousands)

AmortizedCost

GrossUnrealizedGains

Fair Value

Money market funds

$

5,923

$



$

5,923

U.S. government-backed securities

9,347

4

$

9,351

Total investments

$

15,270

$

4

$

15,274

Reported as:

Cash and cash equivalents

$

5,718

Marketable securities

9,351

Restricted cash

205

Total investments

$

15,274

No investments with gross unrealized losses were held at March 31, 2013 or December 31, 2012.
There were no realized gains or losses recorded from the sale of marketable securities for the three months ended March 31, 2013.

4. Fair Value of Financial Instruments

Cash, accounts payable, and accrued liabilities are carried at cost, which approximates fair value given their
short-term nature. Marketable securities, cash equivalents and warrants for convertible preferred stock are carried at fair value.

The fair value of financial instruments reflects the amounts that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date (exit price). The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable, and the third is considered unobservable, as follows:

Level 2  Inputs other than those included in Level 1 that are directly or indirectly observable, such as quoted prices for similar
assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities.

Level 3  Unobservable inputs that are supported by little or no market activity and
that are significant to the fair value of the assets or liabilities.

The Company measures the fair value of financial assets
and liabilities using the highest level of inputs that are reasonably available as of the measurement date. The following tables summarize the fair value of financial assets and liabilities (investments and convertible preferred stock warrant
liabilities) that are measured at fair value and the classification by level of input within the fair value hierarchy:

The Companys Level 2 investments include U.S. government-backed securities that are valued based
upon observable inputs that may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The average remaining
maturity of the Companys Level 2 investments as of March 31, 2013 is less than six months and all of these investments are rated by S&P and Moodys at AAA or AA+.

The following table presents changes in financial instruments measured at fair value using Level 3 inputs:

ConvertiblePreferred
StockWarrantLiabilites

(in thousands)

Balance at December 31, 2012

$

157

Reclassification of preferred stock warrant liabilities to additional paid-in capital in conjunction with the conversion of the
convertible preferred stock into common stock upon the closing of the Companys IPO

(157

)

Balance at March 31, 2013

$



The estimated fair value of the notes payable as of March 31, 2013, as measured using Level 3
inputs, approximates the carrying amount as presented on the condensed consolidated balance sheet.

In September 2012, the Company entered into a loan and security agreement (the Agreement) with MidCap Financial, SBIC, LP (MidCap Financial), providing for the borrowing of up to $15 million, of which $10
million was required to be drawn. The remaining $5 million may be drawn at the option of the Company. The Agreement provides for the loan to be issued in three tranches: the first tranche of $5 million was issued in September 2012; the second
tranche of $5 million was issued in December 2012; and the final tranche may be drawn at the option of the Company no later than June 2013. The loan has a monthly variable interest rate, reset each month, if applicable, as determined by adding to
600 basis points the greater of: (a) one month LIBOR or (b) 3% (the LIBOR floor). Interest on amounts outstanding are payable monthly in arrears. There is an interest only period to December 31, 2013 followed by straight-line
principal payments over thirty-six months. At the time of final payment, the Company must pay an exit fee of 3% of the drawn amount. Pursuant to the Agreement, the Company provided a first priority security interest in all existing and
after-acquired assets, excluding intellectual property. In addition, the terms of the Agreement provided MidCap Financial a warrant to purchase shares of the Companys Series E convertible preferred stock (Series E Preferred) equal to 4% of the
amount drawn down under the facility divided by the Series E Preferred exercise price of $12.11 per share. The warrant expired upon the completion of the Companys IPO.

The Company has the right to prepay all or a portion of the borrowed amounts under the Agreement; however, if the Company exercises this option, the Company must pay a prepayment fee determined by
multiplying the outstanding loan amount by 5% if the prepayment occurs through December 31, 2014, 2% if the prepayment occurs in 2015 and 1% if the prepayment occurs in the final year. In the event of default, upon which all amounts borrowed
become immediately due and payable, the Company will be subject to the prepayment fee. An event of default includes, but is not limited to, an occurrence such as a payment default, a material adverse change, insolvency, or a change of control.

In connection with the Agreement and the first tranche drawdown of $5 million in September 2012 and second tranche drawdown
of $5 million in December 2012, the Company issued a warrant to MidCap Financial to purchase shares of the Companys Series E Preferred. Contemporaneously with the issuance of the warrant, the Company recorded a debt discount of $79,000.

Debt issuance costs paid directly to MidCap Financial of $114,000 (financing fees) and the fair value of the warrant issued
to MidCap Financial were treated as a discount on the debt and are being accreted using the interest method. Other debt issuance costs for legal fees are included in other assets in the accompanying consolidated balance sheet and are being amortized
using the interest method. The accretion of the debt discount and amortization of other debt issuance costs are recorded as interest expense in the consolidated statements of comprehensive loss.

The Company recorded interest expense related to the borrowings of $262,000 for the three months ended March 31, 2013. Included in
interest expense for this period was interest on principal, amortization of the debt issuance costs, accretion of debt discount, and the accretion of the final exit fee. For the three months ended March 31, 2013, the effective interest rate on
the amounts borrowed under the Agreement, including the accretion of the debt discount and the accretion of the final payment, was 9.9%.

Future payments as of March 31, 2013 under the Agreement are as follows (in thousands):

Remainder of 2013

$

1,035

2014

3,995

2015

3,699

2016

3,403

Total minimum payments

12,132

Less amount representing interest

(2,132

)

Notes payable, gross

10,000

Discount on notes payable

(170

)

Accretion of the final exit fee payment

31

9,861

Less current portion of notes payable

(811

)

Long-term notes payable

$

9,050

6. Commitments and Contingencies

Guarantees and Indemnifications

The Company, as permitted under Delaware law and in accordance with its bylaws, has agreed to indemnify its officers and directors for certain events or occurrences, subject to certain limits, while the
officer or director is or was serving at the Companys request in such capacity. The term of the indemnification period is equal to the officers or directors lifetime. The maximum amount of potential future indemnification is
unlimited; however, the Company currently holds director and officer liability insurance. This insurance limits the Companys exposure and may enable it to recover a portion of any future amounts paid.

The Company has certain agreements with service providers with which it does business that contain indemnification provisions pursuant to
which the Company typically agrees to indemnify the party against certain types of third-party claims. The Company accrues for known indemnification issues when a loss is probable and can be reasonably estimated. The Company would also accrue for
estimated incurred but unidentified indemnification issues based on historical activity. As the Company has not incurred any indemnification losses to date, there were no accruals for or expenses related to indemnification issues for any period
presented.

7. Sanofi

In January 2010, the Company and Sanofi entered into an agreement for the development and commercialization of KB001-A,
an investigational new biologic for the treatment and prevention of Pseudomonas aeruginosa (Pa) infections (the Sanofi agreement). Under the terms of the Sanofi agreement, the Company received an initial upfront non-refundable
payment of $35 million and received an additional non-refundable payment of $5 million that represented a second installment of the upfront fees due to the Company under the agreement upon completion of a sublicense negotiation with a third party in
August 2011. The Company may also receive development, regulatory and commercial contingent payments for a potential further $250 million, as well as royalties on eventual product sales, if any. These contingent payments do not meet the definition
of milestones since they are based solely on Sanofis performance and therefore, the milestone method will not be applied to these payments. Sanofi is solely responsible for conducting, at its cost, the research, development, manufacture, and
commercialization of the licensed products for the diagnosis, treatment and/or prevention of all human diseases and conditions caused by Pa, except that the Company retains responsibility, at the Companys cost, for developing and
promoting the products for the diagnosis, treatment and/or prevention of Pa in patients with CF or bronchiectasis. Sanofi has an option to obtain rights to participate in the development and promotion of KB001-A and other licensed
products for the diagnosis, treatment and/or prevention of Pa in patients with CF or bronchiectasis on pre-negotiated terms, either outside of the U.S. or worldwide, at any time up to 90 days after the delivery by the Company to
Sanofi of the final clinical study report from the Companys Phase 2 clinical trial of KB001-A in Pa-infected patients with CF.

The agreement will remain in effect until all payment obligations under the agreement end.
Sanofi may terminate the agreement for convenience, and either Sanofi or the Company may terminate the agreement for material breach of the agreement by the other party. In the event Sanofi terminates the agreement for convenience or the Company
terminates due to Sanofis material breach, worldwide rights to develop, manufacture and commercialize licensed products would revert back to the Company, and Sanofi would grant to the Company a license to allow it to develop, manufacture, and
commercialize licensed products worldwide, subject to commercially reasonable financial terms to be negotiated by the parties after such termination. In the event that the Company materially breaches the agreement, Sanofi may terminate the agreement
or, rather than terminate the agreement, opt to deduct any damages awarded for the Companys breach against future contingent payments and royalties otherwise payable by Sanofi under the agreement.

The upfront payment of $40 million was recognized over the estimated period of the Companys substantive performance obligations
under the agreement. For the years ended December 31, 2010 and 2011, the Company estimated that substantive performance obligations under the agreement would be completed by March 31, 2012. During the three-month period ended
March 31, 2012, the Company and Sanofi agreed to amend the 2010 agreement as Sanofi requested that the Company perform additional services. Therefore, in the three-month period ended March 31, 2012, the Company revised its estimate to
reflect that the substantive performance obligations under the agreement were expected to be completed by June 30, 2012. The substantive performance obligations under the agreement were completed by June 30, 2012.

Under the terms of the Sanofi agreement, the Company receives specified research and development funding for services performed in
connection with KB001-A research and development efforts. Reimbursements received by the Company for these services are recorded as contract revenue when earned as the related services are provided.

As of December 31, 2012, convertible preferred stock balances were as follows:

SharesAuthorized

Shares Issuedand Outstanding

Carrying Value

LiquidationAmount

(In thousands)

(In thousands)

Series A

1,527,611

428,922

$

1,835

$

2,200

Series B-1

3,425,152

961,720

4,726

4,932

Series B-2

14,811,323

4,119,759

21,039

21,128

Series C

6,944,450

1,949,874

19,905

20,000

Series D

11,385,196

3,196,755

35,673

37,002

Series E

22,058,823

1,672,300

18,845

20,250

60,152,555

12,329,330

$

102,023

$

105,512

The Company recorded the convertible preferred stock at fair value on the dates of issuance, net of
issuance costs. The Company had classified the convertible preferred stock outside of stockholders equity (deficit) because the shares contained redemption features that were not solely within its control. Upon the closing of the
Companys IPO in February 2013 due to certain anti-dilution provisions of the convertible preferred stock, 12,329,330 outstanding shares of convertible preferred stock were converted into 13,211,120 shares of common stock, and the related
carrying value of $102.0 million was reclassified to additional paid-in capital. At March 31, 2013, no convertible preferred shares were authorized, issued or outstanding.

Warrants to Purchase Convertible Preferred Stock

Series B-2 Convertible Preferred Stock

In February 2013, in connection with the Companys IPO, all outstanding warrants to purchase Series B-2 convertible
preferred stock converted into warrants to purchase an aggregate of 38,997 shares of common stock at $5.13 per share. Such warrants will expire on October 31, 2015.

Series E Convertible Preferred Stock

The warrant to purchase shares of the
Companys Series E convertible preferred stock expired upon the closing of the Companys IPO in February 2013.

9. Stock Plans and Stock-Based Compensation

2012 Equity Incentive Plan

As of March 31, 2013, under the 2012 Equity Incentive Plan, the Company may grant shares and/or options to purchase up to 2,109,789 shares of common stock to employees, directors, consultants, and
other service providers. For options, the per share exercise price may not be less than the fair market value of a Company common share on the date of grant. Options generally vest over four years, expire 10 years from the date of grant, and become
exercisable as they vest following the date of grant.

A summary of stock option activity for the three months ended March 31, 2013 under all
of the Companys options plans is as follows:

Options

WeightedAverageExercisePrice

Outstanding at December 31, 2012

1,030,795

$

2.68

Granted

39,826

6.42

Forfeited

(20,560

)

2.65

Outstanding at March 31, 2013

1,050,061

$

2.83

Weighted-average fair value of options granted during the period

$

3.42

Stock-Based Compensation

The Company recorded stock-based compensation expense in the condensed consolidated statements of comprehensive loss as follows:

Three MonthsEnded March 31,

(In thousands)

2013

2012

General and administrative

$

85

$

9

Research and development

96

12

$

181

$

21

At March 31, 2013, the Company had $2.7 million of total unrecognized compensation expense, net of
estimated forfeitures, related to outstanding stock options that will be recognized over a weighted-average period of 3.2 years.

Managements Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

The following discussion and analysis should be read in conjunction with our financial statements and accompanying notes included in
this Quarterly Report on Form 10-Q and the financial statements and accompanying notes thereto and Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2012, filed with the Securities and Exchange Commission, or SEC, on March 29, 2013. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. Such forward looking statements involve risks and uncertainties. We use words such as may, will, expect, anticipate, estimate, intend,
plan, predict, potential, believe, should and similar expressions to identify forward-looking statements. Although we believe the expectations reflected in these forward-looking statements
are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. These statements appearing throughout this Quarterly Report on Form 10-Q are statements regarding our
intent, belief, or current expectations, primarily regarding our operations. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Quarterly Report on Form 10-Q. As a result of many
factors, such as those set forth under Risk Factors under Item 1A of Part II below, and elsewhere in this Quarterly Report on Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking
statements. We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

Overview

We are a biopharmaceutical company focused
on monoclonal antibody therapeutics for diseases that are a significant burden to society and patients and their families. We have a portfolio of patient-targeted, first-in-class antibodies using our Humaneered® antibody technology to treat serious medical conditions with a
primary clinical focus on respiratory diseases and cancer. Our principal pharmaceutical product candidates at the clinical development stage are:



KB001-A, a
Humaneered®, PEGylated, anti-PcrV Fab antibody
that is being developed for the prevention and treatment of Pa infections in mechanically ventilated patients and CF patients with chronic Pa infections;



KB003, a
Humaneered® anti-GM-CSF monoclonal antibody that is
being developed for the treatment of severe asthma inadequately controlled by corticosteroids; and



KB004, a
Humaneered® anti-EphA3 monoclonal antibody that has
the potential to offer a novel approach to treating both hematologic malignancies and solid tumors.

In
January 2010, we entered into an agreement with Sanofi pursuant to which we granted to Sanofi an exclusive worldwide license to develop, manufacture, and commercialize antibodies directed against the PcrV protein of Pa (including KB001-A) for
all indications, and Sanofi is solely responsible for research, development, manufacturing, and commercialization. As part of this agreement, we retained the right to develop and promote KB001-A for Pa in CF or bronchiectasis patients. Sanofi
is focusing its clinical development on prevention of Pa VAP. Pursuant to the agreement, we received an initial upfront payment of $35 million and an additional $5 million payment in August 2011 that were recognized as revenue through June
30, 2012. We have the potential to receive additional contingent payments aggregating up to $250 million upon achievement by Sanofi of certain clinical, regulatory and commercial events, together with tiered royalties based upon global net sales of
licensed products. However, there can be no assurances that Sanofi will continue to further develop KB001-A or achieve the events that will trigger the contingent payments. As a result, we may not recognize any additional revenue from this
arrangement. We are conducting a Phase 2 clinical trial in CF patients with chronic Pa infections. As part of Sanofis clinical development plan for Pa VAP, Sanofi is conducting a Phase 1 clinical study in healthy volunteers to
evaluate higher doses than those that we previously tested. We understand that the Phase 1 study will be followed, after completion of manufacturing process development and scale-up, by a Phase 2b intravenous study in late 2014 to determine the
safety and efficacy of KB001-A in preventing Pa VAP and then based on results from their clinical trial Sanofi plans to conduct a subsequent Phase 3 study. We also understand that the Phase 2b and Phase 3 trials are being designed as pivotal
studies and are intended to serve as a basis for registration of KB001-A for the prevention of Pa VAP.

We initiated a 180 patient randomized, double-blind, placebo-controlled monthly-dosed,
intravenous Phase 2 clinical trial of KB001-A in CF patients with chronic Pa infections in January 2013. In August 2012, we initiated a 150 patient, randomized, double-blind, placebo-controlled, monthly-dose, intravenous Phase 2 clinical
trial of KB003 in patients with severe asthma inadequately controlled by corticosteroids. KB004 is in Phase 1 clinical testing for hematological malignancies. We believe the net proceeds from our initial public offering, together with our cash, cash
equivalents, and marketable securities, and our borrowing capacity pursuant to the loan and security agreement we entered into with MidCap Financial in September 2012, will be sufficient to complete our KB001-A and KB003 Phase 2 clinical trials as
currently projected. If the KB001-A or KB003 Phase 2 clinical trials are successful, we will need to raise additional capital in order to further advance our product candidates towards regulatory approval.

We licensed our proprietary Humaneered® antibody technology to Novartis in 2007 on a non-exclusive basis and received a license fee of $30 million. We are not currently actively pursuing the license of
our Humaneered® technology to third parties and we are not expecting to receive future revenue from
additional licenses to this technology.

From the date we commenced our operations through 2006, our
efforts focused primarily on research, development, and the advancement of our Humaneered® antibody
technology. In 2006, we commenced our first clinical trial. We have incurred significant losses to date and, as of March 31, 2013, we had an accumulated deficit of $106.8 million. We have funded our operations primarily through private
placements of our equity securities, contract revenue in connection with our collaborations, and grants and borrowings under equipment financing arrangements and our loan and security agreement. As of March 31, 2012, we had cash, cash
equivalents, and marketable securities of $76.9 million. On February 5, 2013, we closed our initial public offering of 8,750,000 shares of common stock at an offering price of $8.00 per share, resulting in net proceeds of approximately $61.5
million, after deducting underwriting discounts, commissions and offering expenses. We expect to continue to incur net losses as we develop our drug candidates, expand clinical trials for our drug candidates currently in clinical development, expand
our research and development activities, expand our systems and facilities, seek regulatory approvals, and engage in commercialization preparation activities in anticipation of FDA approval of our drug candidates. Specifically, we have incurred, and
we expect to continue to incur, substantial expenses in connection with our Phase 2 clinical trials for KB003 in severe asthma patients inadequately controlled by cortiscosteroids and for KB001-A in CF patients with chronic Pa infections. In
addition, if a product is approved for commercialization, we will need to expand our organization. Significant capital is required to launch a product and many expenses are incurred before revenue is received. We are unable to predict the extent of
any future losses or when we will become profitable, if at all.

In December 2012, our board of directors approved a
1-for-3.56147 reverse split of our issued and outstanding capital stock which became effective on January 15, 2013. Upon the effectiveness of the reverse stock split, (i) every 3.56147 shares of issued and outstanding common stock and
convertible preferred stock was decreased to one share of common stock or convertible preferred stock, as applicable, (ii) the number of shares of common stock into which each outstanding option to purchase common stock is exercisable was
proportionally decreased on a 1-for-3.56147 basis and the number of shares of convertible preferred stock into which each outstanding warrant is exercisable was proportionally decreased on a 1-for-3.56147 basis and, (iii) the exercise price of
each outstanding option to purchase common stock and warrant to purchase convertible preferred stock was proportionately increased. All of the share numbers, share prices, exercise prices and other per share information have been adjusted within
this Quarterly Report on Form 10-Q, on a retroactive basis, to reflect this 1-for-3.56147 reverse stock split

Critical Accounting Policies
and Use of Estimates

Our managements discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We base
our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances and review our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or
conditions.

We are an emerging growth company under the JOBS Act. Emerging growth companies can delay
adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the
same new or revised accounting standards as other public companies that are not emerging growth companies.

There have been no
significant and material changes in our critical accounting policies during the three months ended March 31, 2013, as compared to those disclosed in Managements Discussion and Analysis of Financial Condition and Results of
OperationsCritical Accounting Policies and Use of Estimates in our Annual Report on Form 10-K (File No. 001-35798), filed with the Securities and Exchange Commission (SEC) on March 29, 2013.

Results of Operations

General

We have not generated any net income from operations, except for the year ended December 31, 2007, during which
we recognized a one-time license payment from Novartis. At March 31, 2013, we had an accumulated deficit of $106.8 million primarily as a result of research and development and general and administrative expenses. While we may in the future
generate revenue from a variety of sources, including license fees, milestone payments, and research and development payments in connection with strategic partnerships, our product candidates are at an early stage of development and may never be
successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future, and there can be no assurance that we will ever generate significant revenue or profits.

Contract Revenue

Our recent revenue is comprised primarily of collaboration agreement-related revenue. Collaboration agreement-related revenue includes
license fees, payments for research and development services, and milestone and other contingent payments.

Research and Development
Expenses

Conducting research and development is central to our business model. We expense both internal and external
research and development costs as incurred. We currently track the external research and development costs incurred for each of our KB001-A, KB003, and KB004 projects. We have not tracked our external costs by project since inception. We began
tracking our external costs by project beginning January 1, 2008. Our external research and development expenses consist primarily of:



expenses incurred under agreements with contract research organizations, investigative sites, and consultants that conduct our clinical trials and a
substantial portion of our preclinical activities;



the cost of acquiring and manufacturing clinical trial and other materials; and



other costs associated with development activities, including additional studies.

Internal research and development costs consist primarily of salaries and related fringe
benefit costs for our employees (such as workers compensation and health insurance premiums), stock-based compensation charges, travel costs, lab supplies, and overhead expenses. Internal costs generally benefit multiple projects and are not
separately tracked per project. The following table shows our total research and development expenses for the three and three months ended March 31, 2013 and 2012:

ThreeMonths EndedMarch 31,

For the Period fromJanuary 1, 2008 toMarch 31, 2013

2013

2012

External costs:

KB001-A

$

1,149

$

543

$

21,444

KB003

2,457

400

25,282

KB004

1,135

642

20,690

Internal costs

1,579

1,635

48,150

Total research and development

$

6,320

$

3,220

$

115,566

We expect to continue to incur substantial expenses related to our development activities for the
foreseeable future as we continue product development including continuing our Phase 2 clinical trial for our KB003 severe asthma program, our Phase 2 clinical trial for our KB001-A CF program and our Phase 1 clinical trial for our KB004 oncology
program. As product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later stage clinical trials, we
expect that our research and development expenses will increase in the future. In addition, if our product development efforts are successful, we expect to incur substantial costs to prepare for potential clinical trials and activities beyond the
Phase 2 trial for KB001-A, the Phase 2 trial for KB003 and Phase 1 trial for KB004.

General and Administrative Expenses

General and administrative expenses consist principally of personnel-related costs, professional fees for legal,
consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development. We anticipate general and administrative expenses will increase in future periods, reflecting an expanding
infrastructure and increased professional fees associated with being a public reporting company.

Contract revenue in each period related solely to our arrangement with Sanofi in which we
licensed the KB001-A program to Sanofi in 2010. Contract revenue decreased $3.0 million, from $3.0 million for the three months ended March 31, 2012 to $16,000 for the three months ended March 31, 2013. This decrease was mainly
attributable to the completion of our substantive performance obligations under our agreement with Sanofi in mid 2012. We expect future contract revenue from Sanofi to remain at a minimal level in future periods unless we receive contingent payments
or royalties under our agreement.

Research and development expenses increased $3.1 million, from $3.2 million for the three
months ended March 31, 2012 to $6.3 million for the three months ended March 31, 2013. The increase was primarily attributed to a $2.7 million increase in spending for clinical trial expenses for our KB003 severe asthma program, increased
spending for our KB001-A CF program, and KB004 program for hematological malignancies, as well as increased consulting expenses of $0.4 million. We began enrollment of patients in the severe asthma program of KB003 in the third quarter of 2012 and
began enrollment in a Phase 2 clinical trial in CF patients with chronic Pa infections in the quarter ended March 31, 2013, and as a result, we expect these expenses to increase significantly.

General and administrative expenses increased $1.1 million, from $0.9 million for the three months ended March 31, 2013 to $2.0
million for the three months ended March 31, 2013 due to increases in legal, accounting and consulting fees of $0.7 million related to being a public reporting company and a $0.4 million increase in payroll related expenses.

Interest income (expense), net decreased $0.3 million for the three months ended March 31, 2013, primarily as a result of the
interest expense related to our loan and security agreement entered into in September 2012.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through our IPO, private placements of our equity
securities, debt financing, interest income earned on cash, and cash equivalents, and marketable securities, lines of credit, and payments under agreements with Sanofi and Novartis. On February 5, 2013, we closed our initial public offering of
8,750,000 shares of common stock at an offering price of $8.00 per share, resulting in net proceeds of approximately $61.5 million, after deducting underwriting discounts, commissions and offering expenses. At March 31, 2013, we had
cash and cash equivalents of $70.0 million and marketable securities of $6.9 million, totaling $76.9 million.

We expect to
incur substantial expenditures in the foreseeable future for the development and potential commercialization of our product candidates. Specifically, we have incurred and we expect to continue to incur substantial expenses in connection with our
Phase 2 clinical trials for KB003 in severe asthma patients inadequately controlled by corticosteroids and for KB001-A in CF patients with chronic Pa infections.

We believe our existing cash, cash equivalents, and marketable securities, including the net proceeds from our initial public offering
and our access to funds through the loan and security agreement we entered into with MidCap Financial in September 2012, will be sufficient to sustain operations for at least the next 12 months based on our existing business plan and enable us to
complete our KB001-A and KB003 Phase 2 clinical trials as currently projected. If the KB001-A and KB003 Phase 2 clinical trials are successful, we will need to raise additional capital in order to further advance our product candidates towards
regulatory approval.

We will continue to require additional financing to develop our products and fund operating losses. We
will seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not be available to us on acceptable terms or at all. Our failure
to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategies. We anticipate that we will need to raise substantial additional capital, the requirements of which will
depend on many factors, including:



the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

the amount of funds we receive in our proposed initial public offering, if consummated; and



the costs associated with being a public company.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or
license to others technologies or clinical product candidates or programs that we would prefer to develop and commercialize ourselves.

The following table sets forth the primary sources and uses of cash and cash equivalents for each of the periods presented below:

Three Months

Ended March 31,

2013

2012

Net cash used in operating activities

$

(7,801

)

$

(3,446

)

Net cash provided by investing activities

2,390

4,685

Net cash provided by financing activities

64,413

21

Net increase in cash and cash equivalents

$

59,002

$

1,260

Net cash used in operating activities was $7.8 million and $3.5 million for the three months ended
March 31, 2013 and 2012, reflecting our net loss adjusted for noncash items. The increase relating to our increasing net loss was partially offset by changes in operating assets and liabilities including significant increases in accounts
payable in 2013 attributed to development and clinical activities.

Net cash provided by investing activities was $2.4 million
for the three months ended March 31, 2013, primarily related to proceeds from maturities of investments. Net cash provided by investing activities was $4.7 million for the three months ended March 31, 2012, primarily related to proceeds
from maturities of investments, net of cash used for the purchase of investments.

Net cash provided by financing activities
was $64.4 million and $21,000 for the three months ended March 31, 2013 and 2012, respectively. The cash provided by financing activities of $64.4 million in the 2013 period related to the net proceeds from our IPO. Cash provided by financing
activities during the three months ended March 31, 2012, was due to cash proceeds from exercises of stock options.

We
expect to incur substantial expenditures in the foreseeable future for the research, development and potential commercialization of our product candidates. We will continue to require additional financing to develop our products and fund operating
losses. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing. Adequate additional funding may not

be available to us on acceptable terms or at all. Our failure to raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business
strategies. If adequate funds are not available to us, we may be required to delay, reduce, or eliminate research and development programs or enter into collaborative or other arrangements for technologies that we would otherwise seek to develop
ourselves or on terms that are less attractive than they might otherwise be.

Contractual Obligations and Commitments

As of March 31, 2013, there were no significant and material changes to our contractual obligations from those
set forth in in our Annual Report on Form 10-K (File No. 001-35798), filed with the Securities and Exchange Commission (SEC) on March 29, 2013.

Off-Balance Sheet Arrangements

We currently have no off-balance sheet
arrangements, such as structured finance, special purpose entities or variable interest entities.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk related to fluctuations in interest rates and market prices. Our primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general
level of U.S. interest rates. However, since a majority of our investments are in short-term FDIC-insured government securities, and money market funds, we do not believe we are subject to any material market risk exposure. The fair value of our
investments included in cash equivalents and marketable securities was $15.1 million and $76.7 million as of December 31, 2012 and March 31, 2013, respectively

We are also exposed to market risk related to fluctuations in interest rates indexed to LIBOR, which determines the variable interest payments made on our notes payable. However, we do not believe we are
subject to any material market risk exposure.

Our investment policy is to limit credit exposure through diversification and
investment in highly rated securities. We, along with our investment advisors, actively review current investment ratings, company specific events, and general economic conditions in managing our investments and in determining whether there is a
significant decline in fair value that is other-than-temporary. We monitor and evaluate our investment portfolio on a quarterly basis for other-than-temporary impairment charges.

Item 4.

Controls and Procedures.

Managements Evaluation of our Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2013. The
term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), means controls and other procedures of a company that are designed
to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and
procedures as of December 31, 2012 and March 31, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such dates, disclosure controls and procedures were not effective at the reasonable assurance level
because of the material weakness in internal control over financial reporting described below.

Overview. Management did not perform an assessment regarding the effectiveness of internal control over financial reporting as of
December 31, 2012 or March 31, 2013. As a newly public company management is not required to perform an assessment of internal control over financial reporting. Such an assessment will be initially required as of December 31, 2013.
However, as of December 31, 2012 and March 31, 2013, a material weakness was identified in the design and operation of our internal control over financial reporting related to the controls over the completeness and accuracy of clinical
trial expenses and related accruals and the associated financial statement close process monitoring and review procedures.

Material weakness in internal control over financial reporting. A material weakness is a control deficiency, or a combination of
control deficiencies such that there is a reasonable possibility that a material misstatement of interim or annual financial statements will not be prevented or detected on a timely basis. As of December 31, 2012 and March 31, 2013, we did
not maintain effective controls over the completeness and accuracy of our clinical trial expenses. Errors were identified in the analysis and preparation of our clinical trial expenses and related balance sheet accounts, including the failure to
accrue expenses from third party contract research organizations (CROs). These control deficiencies resulted in the misstatement of clinical trial expenses in the fourth quarter of 2012 and certain previously reported periods. The
correction of these errors resulted in adjustments to increase clinical trial expenses that were recorded in the fourth quarter ended December 31, 2012. These errors arose from control deficiencies that, in the aggregate, could result in a
misstatement to the aforementioned accounts that could result in a material misstatement of our annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that these control deficiencies, in
the aggregate, constitute a material weakness.

Notwithstanding the material weakness described above, we believe the
Companys financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Companys financial position, results of operations and cash flows for the periods presented. Our Chief Executive
Officer and Chief Financial Officer have certified to their knowledge that this Quarterly Report on Form 10-Q does not contain any untrue statements of material fact or omit to state any material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the periods covered in this quarterly report.

Plan for Remediation of Material Weakness. We have discussed this material weakness
with our independent registered public accounting firm and our Audit Committee. We have and are continuing to take significant actions to remediate the material weakness related to our internal controls over the completeness and accuracy of our
clinical trial expenses and related accruals and the associated financial statement close process monitoring and review procedures. We are strengthening our procedures over clinical trial accruals, including the verification of the costs incurred by
our CROs. In addition, we are actively recruiting to hire additional finance staff and to continue to implement plans to enhance our reporting systems and procedures as well as provide for greater and more consistent oversight in the preparation of
clinical trial expenses. We are strengthening and will continue to strengthen our internal controls over clinical trial expenses during the remainder of the year. We believe that these corrective actions, taken as a whole, will remediate the control
deficiencies identified above, but we will continue to monitor the effectiveness of these actions and intend to make any other changes or take such other actions as we determine to be appropriate.

We are in the process of developing a plan for testing our internal controls and managements related assessment of internal control
over financial reporting as provided under Section 404 of the Sarbanes-Oxley Act of 2002. If we are unable to correct the material weakness we have identified prior to the end of fiscal year 2013, or if we experience other problems that prevent
the favorable assessment of the effectiveness of our internal control over financial reporting, we will be required to conclude and report that our internal control over financial reporting is not effective as of that date and investor confidence
and our stock price could be adversely affected.

Changes in Internal Control Over Financial Reporting

We are taking significant actions to remediate the material weakness related to our internal controls over the completeness and accuracy
of our clinical trial expenses and related accruals and the associated financial statement close process monitoring and review procedures. However, our remediation of these controls is not complete as of March 31, 2013. Other than the changes
disclosed above, there has been no change in our internal control over financial reporting during the quarter ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.

Risk Related to Our
Business and the Development, Regulatory Approval, and Commercialization of Our Product Candidates

We have a history
of operating losses, we expect to continue to incur losses, and we may never become profitable.

As of March 31,
2013, we had an accumulated deficit of $106.8 million, and for the three months ended March 31, 2013, we incurred a net loss of $8.6 million. We have incurred net losses each year since our inception except for the year ended December 31,
2007, including net losses of $23.5 million for the year ended December 31, 2012, and $2.2 million for the year ended December 31, 2011. To date, we have only recognized revenue from payments for funded research and development and for
license or collaboration fees. We expect to make substantial expenditures and incur additional operating losses in the future to further develop and commercialize our product candidates. Our accumulated deficit is expected to increase significantly
as we expand our development and clinical trial efforts. Our ability to achieve and sustain profitability depends on obtaining regulatory approvals for and successfully commercializing our lead product candidates, either alone or with third parties.
We do not currently have the required approvals to market any of our product candidates and we may never receive them. We may not be profitable even if we, Sanofi, or any of our future development partners succeed in commercializing any of our
product candidates. Because of the numerous risks and uncertainties associated with developing and commercializing our product candidates, we are unable to predict the extent of any future losses or when we will become profitable, if at all.

We have limited sources of revenue, and we will need substantial additional capital to develop and commercialize our
product candidates, and we may be unable to raise additional capital when needed, or at all, which would force us to reduce or discontinue operations.

As of March 31, 2013, we had $76.9 million in cash, cash equivalents, and marketable securities. Our contract revenue for the three months ended March 31, 2013 was $16,000. We consumed a net
$7.8 million of cash in operating activities during the three months ended March 31, 2013. We expect our spending levels to increase in connection with our Phase 2 clinical trials for KB001-A and KB003, as well as other corporate activities.

Our spending levels vary based on new and ongoing development and corporate activities. As a result, our cash used in
operating activities will also fluctuate from period to period. We have not sold any product candidates, and we do not expect to sell any product candidates or derive royalty revenue from product candidate sales for the foreseeable future, if ever.
In order to develop and bring product candidates through clinical trials, we must commit substantial resources to costly and time-consuming clinical trials. As such, we anticipate that we will need to raise substantial additional capital, the
requirements of which will depend on many factors, including:



the type, number, costs, and results of the product candidate development programs which we are pursuing or may choose to pursue in the future;

Since our inception, we have been financing our operations primarily through private placements of our equity
securities, interest income earned on cash, cash equivalents, and marketable securities, lines of credit, and payments under agreements with Sanofi and Novartis International Pharmaceutical Ltd. (together with its affiliates, Novartis), a licensee
of our Humaneered® technology. Our future capital requirements are substantial and in order to fund our future
needs, we may seek additional funding through equity or debt financings, development partnering arrangements, lines of credit, or other sources. We believe our cash on hand, together with the net proceeds received from our recently completed initial
public offering and our access to funds through our existing credit facility, will be sufficient to fund our operations for the next 12 months. Our expectations are based on managements current assumptions and clinical development plans, which
may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. We will require substantial additional capital to support clinical trials, regulatory approvals, and, if approved, the potential
commercialization of our product candidates. Additional funding may not be available to us on a timely basis or at acceptable terms, or at all.

If we are unable to raise additional funds when needed, we may be required to delay, reduce, or terminate some or all of our development programs and clinical trials. We may also be required to sell or
license to others our technologies, product candidates, or development programs that we would have preferred to develop and commercialize ourselves.

Because we have a short operating history developing clinical-stage antibodies, there is a limited amount of information about us upon which you can evaluate our product candidates and business
prospects.

We commenced our first clinical trial in 2006, and we have a limited operating history developing
clinical-stage antibodies upon which you can evaluate our business and prospects. In addition, as an early-stage clinical development company, we have limited experience in conducting clinical trials, and we have never conducted clinical trials of a
size required for regulatory approvals. Further, we have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the
biopharmaceutical area. For example, to execute our business plan we will need to successfully:

build and maintain appropriate clinical, sales, distribution, and marketing capabilities on our own or through third parties; and



gain broad market acceptance for our product candidates.

If we are unsuccessful in accomplishing these objectives, we may not be able to develop product candidates, raise capital, expand our business, or continue our operations.

Our product candidates are at an early stage of development and may not be successfully developed or commercialized.

Our product candidates are in the early stage of development and will require substantial clinical development,
testing, and regulatory approval prior to commercialization. We currently only have two product candidates in Phase 2 clinical trials and one product candidate in Phase 1 clinical trials. None of our product candidates have advanced into a pivotal
study and it may be years before such study is initiated, if at all. Of the large number of drugs in development, only a small percentage successfully complete the FDA regulatory approval process and are commercialized. Accordingly, even if we are
able to obtain the requisite financing to continue to fund our development programs, we cannot assure you that our product candidates will be successfully developed or commercialized. If we, Sanofi, or any of our future development partners are
unable to develop, or obtain regulatory approval for or, if approved, successfully commercialize, one or more of our product candidates, we may not be able to generate sufficient revenue to continue our business.

We have recently decided to focus on the intravenous formulation of KB001-A for CF rather than a subcutaneous formulation. There can be
no assurance that an intravenous formulation will be successfully developed or, if it obtains regulatory approval, such formulation will be more commercially viable than a subcutaneous formulation.

Our product candidates are subject to extensive regulation, compliance with which is costly and time consuming, may cause
unanticipated delays, or prevent the receipt of the required approvals to commercialize our product candidates.

The
clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, import, export, marketing, and distribution of our product candidates are subject to extensive regulation by the FDA in the United States and by
comparable authorities in foreign markets. In the United States, we are not permitted to market our product candidates until we receive regulatory approval from the FDA. The process of obtaining regulatory approval is expensive, often takes many
years, and can vary substantially based upon the type, complexity, and novelty of the products involved, as well as the target indications. Approval policies or regulations may change and the FDA has substantial discretion in the drug approval
process, including the ability to delay, limit, or deny approval of a product candidate for many reasons. Despite the time and expense invested in clinical development of product candidates, regulatory approval is never guaranteed.

The FDA or other comparable foreign regulatory authorities can delay, limit, or deny approval of a product candidate for many reasons,
including:

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such authorities may disagree with the design or implementation of our, Sanofis, or any of our future development partners clinical trials;

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we, Sanofi, or any of our future development partners may be unable to demonstrate to the satisfaction of the FDA or other regulatory authorities that
a product candidate is safe and effective for any indication;



such authorities may not accept clinical data from trials which are conducted at clinical facilities or in countries where the standard of care is
potentially different from the United States;

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the results of clinical trials may not demonstrate the safety or efficacy required by such authorities for approval;

we, Sanofi, or any of our future development partners may be unable to demonstrate that a product candidates clinical and other benefits outweigh
its safety risks;

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such authorities may disagree with our interpretation of data from preclinical studies or clinical trials or the use of results from antibody studies
that served as precursors to our current drug candidates;

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such authorities may find deficiencies in the manufacturing processes or facilities of third-party manufacturers with which we, Sanofi, or any of our
future development partners contract for clinical and commercial supplies;

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we may not be successful in developing any companion diagnostic necessary to demonstrate efficacy in our desired target populations for KB004;

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such authorities may delay approval or clearance of any companion diagnostic for KB004; or

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the approval policies or regulations of such authorities may significantly change in a manner rendering our, Sanofis, or any of our future
development partners clinical data insufficient for approval.

With respect to foreign markets,
approval procedures vary among countries and, in addition to the aforementioned risks, can involve additional product testing, administrative review periods, and agreements with pricing authorities. In addition, events raising questions about the
safety of certain marketed pharmaceuticals may result in increased cautiousness by the FDA and comparable foreign regulatory authorities in reviewing new drugs based on safety, efficacy or other regulatory considerations and may result in
significant delays in obtaining regulatory approvals. Any delay in obtaining, or inability to obtain, applicable regulatory approvals would prevent us, Sanofi, or any of our future development partners from commercializing our product candidates.

The results of preclinical studies and early clinical trials are not always predictive of future results. Any product
candidate we, Sanofi, or any of our future development partners advance into clinical trials may not have favorable results in later clinical trials, if any, or receive regulatory approval.

Drug development has inherent risk. We, Sanofi, or any of our future development partners will be required to demonstrate through adequate
and well-controlled clinical trials that our product candidates are effective, with a favorable benefit-risk profile, for use in their target indications before we can seek regulatory approvals for their commercial sale. Drug development is a long,
expensive and uncertain process, and delay or failure can occur at any stage of development, including after commencement of any of our clinical trials. In addition, success in early clinical trials does not mean that later clinical trials will be
successful because product candidates in later-stage clinical trials may fail to demonstrate sufficient safety or efficacy despite having progressed through initial clinical testing. Furthermore, our future trials will need to demonstrate sufficient
safety and efficacy for approval by regulatory authorities in larger patient populations. Companies frequently suffer significant setbacks in advanced clinical trials, even after earlier clinical trials have shown promising results. In addition,
only a small percentage of drugs under development result in the submission of a New Drug Application (NDA) or BLA to the FDA and even fewer are approved for commercialization.

Although we have completed two Phase 1/2 clinical studies of KB001, the precursor molecule to KB001-A, Sanofi has commenced a Phase 1
clinical study of KB001-A in healthy volunteers to evaluate higher doses than those that we previously tested and planned for in our Phase 2 CF development program. The results of Sanofis Phase 1 clinical study could delay or adversely impact
our KB001-A development program.

Furthermore, the efficacy or safety data demonstrated with KB001 and KB002, the precursor
molecules to KB001-A and KB003, respectively, may not be reproduced in KB001-A and KB003. Similarly, the subcutaneous formulation KB003 may not produce any efficacy observed with intravenous formulations. We may need to conduct additional
preclinical and clinical testing to confirm such data in the successor molecules and reformulations. We are continuing further evaluations of the subcutaneous formulations for KB003 and

have yet to reach the stage at which we will inform the FDA that we intend to switch the dosage form from an intravenous to a subcutaneous formulation. Also, our current development timelines are
based on demonstrating to the FDA that KB001-A is comparable to KB001 and that data obtained with intravenous KB003 can be bridged to the development of a subcutaneous formulation. There can be no assurance that we will be successful in
demonstrating this comparability to the FDA on our current timelines, or at all. In addition, we do not currently plan to test different dose levels of drug until we conduct our pivotal trials. Because we will be testing different dose levels as
part of our pivotal trials, the trials will be larger than the standard pivotal trial. In addition, testing dose levels at a later stage in development increases the risk that we will not successfully identify a dose with an acceptable safety and
efficacy profile.

Any product candidate we, Sanofi, or any of our future development partners advance into clinical
trials may cause unacceptable adverse events or have other properties that may delay or prevent its regulatory approval or commercialization or limit its commercial potential.

Unacceptable adverse events caused by any of our product candidates that we advance into clinical trials could cause us or regulatory
authorities to interrupt, delay, or halt clinical trials and could result in the denial of regulatory approval by the FDA or other regulatory authorities for any or all targeted indications and markets. This in turn could prevent us from completing
development or commercializing the affected product candidate and generating revenue from its sale. For example, we observed fatal intracranial hemorrhages in two subjects deemed possibly related to the study drug by the study investigator in our
KB004 Phase 1 clinical trial and, as a result, we amended our clinical protocol, which caused a delay in our program.

We and
Sanofi have not yet completed testing of any of our product candidates for the treatment of the indications for which we intend to seek approval in humans, and we currently do not know the extent of adverse events, if any, that will be observed in
individuals who receive any of our product candidates. If any of our product candidates cause unacceptable adverse events in clinical trials, we and Sanofi, as applicable, may not be able to obtain regulatory approval or commercialize such product
candidate.

Anti-GM-CSF antibodies, including KB003, may contribute to the development of pulmonary alveolar proteinosis
(PAP), in which case we may need to delay, redesign or terminate our clinical trials of KB003.

PAP is a very uncommon
lung disease which is associated with the presence of high concentrations of antiGM-CSF antibody, but such antibodies alone may not be sufficient to cause disease. PAP is characterized by excessive accumulation of the normal alveolar lining
fluid (surfactant) within the lung. The clinical course of PAP is variable, ranging from spontaneous remission to respiratory failure. The estimated incidence of the disorder is 0.36 per 1 million people per year. Although PAP is
associated with anti-GM-CSF antibodies, it is unclear if these antibodies are the sole cause of surfactant accumulation. For example, blood donors and cancer patients who have measurable anti-GM-CSF antibodies do not develop signs or symptoms of
PAP. Natural neutralizing anti-GM-CSF antibodies have been reported in 0.3% of healthy populations. While we believe the risk for development of PAP with KB003 is low, in the event that KB003 is linked to the development of PAP, we may need to
delay, redesign, or terminate our clinical trials of KB003.

We may experience delays in commencing or conducting our
clinical trials or in receiving data from third parties or in the completion of clinical testing, which could result in increased costs to us and delay our ability to generate product candidate revenue.

Before we can initiate clinical trials in the United States for our product candidates, we need to submit the results of preclinical
testing to the FDA as part of an IND application, along with other information including information about product candidate chemistry, manufacturing, and controls and our proposed clinical trial protocol. We rely in part on preclinical, clinical,
and quality data generated by Sanofi and other third parties for regulatory submissions for KB001-A. If Sanofi does not make timely regulatory submissions for KB001-A, it

will delay our plans for our clinical trials for CF. If those third parties do not make this data available to us, we will likely have to develop all necessary preclinical and clinical data on
our own, which will lead to significant delays and increase development costs of the product candidate. In addition, the FDA may require us to conduct additional preclinical testing for any product candidate before it allows us to initiate clinical
testing under any IND, which may lead to additional delays and increase the costs of our preclinical development. Despite the presence of an active IND for a product candidate, clinical trials can be delayed for a variety of reasons including delays
in:

reaching agreement on acceptable terms with prospective contract research organizations (CROs) and trial sites, the terms of which can be subject to
extensive negotiation, may be subject to modification from time to time, and may vary significantly among different CROs and trial sites;

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obtaining sufficient quantities of a product candidate for use in clinical trials, including as a result of transferring the manufacturing of a product
candidate to another site or manufacturer;

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obtaining and maintaining institutional review board (IRB) or ethics committee approval to conduct a clinical trial at an existing or prospective site;

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identifying, recruiting, and enrolling subjects to participate in a clinical trial;

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retaining or replacing participants who have initiated a clinical trial but may withdraw due to adverse events from the therapy, insufficient efficacy,
fatigue with the clinical trial process, or personal issues; and

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readiness of any companion diagnostic necessary to ensure that the study enrolls the target population. The FDA may also put a clinical trial on
clinical hold at any time during product candidate development.

Once a clinical trial has begun,
recruitment and enrollment of subjects may be slower than we anticipate. In addition, clinical trials will take longer than we anticipate if we are required, or believe it is necessary, to enroll additional subjects. Clinical trials may also be
delayed as a result of ambiguous or negative interim results. Further, a clinical trial may be suspended or terminated by us, an IRB, an ethics committee, or a data safety monitoring committee overseeing the clinical trial, any of our clinical trial
sites with respect to that site or the FDA or other regulatory authorities due to a number of factors, including:

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failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;

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inspection of the clinical trial operations or clinical trial site by the FDA or other regulatory authorities;

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unforeseen safety issues, known safety issues that occur at a greater frequency or severity than we anticipate, or any determination that the clinical
trial presents unacceptable health risks; or

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lack of adequate funding to continue the clinical trial.

Additionally, under the terms of our license and collaboration agreement with Sanofi, Sanofi has the exclusive right to develop and commercialize KB001, KB001-A and other antibodies directed against the
PcrV protein or Pa for all indications. Although this agreement requires Sanofi to use commercially reasonable efforts to engage in certain product development activities, Sanofi may decide to amend, suspend or terminate the clinical trials
related to these licensed product candidates. Further, if Sanofi or any of our future development partners do not develop the licensed product candidates in the manner that we expect, or at all, the clinical development efforts related to these
licensed product candidates could be delayed or terminated.

Any delays in the commencement of our clinical trials, including
any delays by Sanofi attributed to terminating or switching any subcontractors for the manufacture of the KB001-A drug substance, will delay our ability to pursue regulatory approval for our product candidates. Changes in U.S. and foreign regulatory

requirements and guidance also may occur and we may need to amend clinical trial protocols to reflect these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs for
re-examination, which may affect the costs, timing, and likelihood of a successful completion of a clinical trial. If we, Sanofi, or any of our future development partners experience delays in the completion of, or if we, Sanofi, or any of our
future development partners must terminate, any clinical trial of any product candidate our ability to obtain regulatory approval for that product candidate will be delayed and the commercial prospects, if any, for the product candidate may suffer
as a result. In addition, many of these factors may also ultimately lead to the denial of regulatory approval of a product candidate.

If we pursue development of a companion diagnostic intended to identify patients who are likely to benefit from KB004, failure to obtain approval for the diagnostic may prevent or delay approval of
KB004.

We are in the initial phases of developing a companion diagnostic which is intended to identify patients who
are likely to derive the most benefit from KB004. If we are able to develop this companion diagnostic, we intend to amend our Phase 1 protocol prior to initiating the expansion phase to include EphA3 positive status as an inclusion criterion.

The FDA regulates companion diagnostics, or in-vitro diagnostics, such as the one we are developing, as medical
devices. FDA regulations pertaining to medical devices govern, among other things, the research, design, development, pre-clinical and clinical testing, manufacture, safety, efficacy, storage, record-keeping, packaging, labeling, adverse event
reporting, advertising, promotion, marketing, distribution, and import and export of medical devices. Pursuant to the Federal Food, Drug, and Cosmetic Act (FDC Act), medical devices are subject to varying degrees of regulatory control and are
classified in one of three classes depending on the controls the FDA determines necessary to reasonably ensure their safety and efficacy. In July 2011, the FDA issued draft guidance that stated that if safe and effective use of a therapeutic depends
on an in vitro diagnostic, then the FDA generally will not approve the therapeutic until it is ready to approve or clear this in vitro companion diagnostic device. While this guidance is still in draft form, we believe that it states
the FDAs current position and that KB004 may not be approved until the FDA has sufficient information to also approve or clear our companion device. Moreover, the FDAs expectations for in vitro companion diagnostics are evolving
and some aspects of the FDAs regulatory approach remain unclear. The FDAs developing expectations will affect, among other things, the development, testing and review of our in vitro companion diagnostics.

Because our companion diagnostic candidate is at an early stage of development, we have yet to seek a meeting with the FDA to discuss our
companion diagnostic test in development and therefore cannot yet know what the FDA will require for this test. We may not be able to develop or obtain approval or clearance for the companion diagnostic, and any failure to obtain regulatory approval
or clearance could delay development or prevent approval of KB004.

If our competitors develop treatments for the target
indications of our product candidates that are approved more quickly, marketed more successfully or demonstrated to be safer or more effective than our product candidates, our commercial opportunity will be reduced or eliminated.

We operate in highly competitive segments of the biotechnology and biopharmaceutical markets. We face competition from many different
sources, including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies, and private and public research institutions. Our product candidates, if successfully developed and approved, will compete with
established therapies as well as with new treatments that may be introduced by our competitors. Many of our competitors have significantly greater financial, product candidate development, manufacturing, and marketing resources than we do. Large
pharmaceutical and biotechnology companies have extensive experience in clinical testing and obtaining regulatory approval for drugs. In addition, many universities and private and public research institutes are active in cancer research, some in
direct competition with us. We also may compete with these organizations to recruit management, scientists,

and clinical development personnel. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established
companies. New developments, including the development of other pharmaceutical technologies and methods of treating disease, occur in the pharmaceutical and life sciences industries at a rapid pace. Developments by competitors may render our product
candidates obsolete or noncompetitive. We will also face competition from these third parties in recruiting and retaining qualified personnel, establishing clinical trial sites, and registering subjects for clinical trials, and in identifying and
in-licensing new product candidates.

There are several companies treating Pa using antibiotics or
alternative approaches. For example, Intercell AG in collaboration with Novartis has a prophylactic vaccine based on two Pa outer-membrane proteins in a Phase 2/3 clinical trial for the prevention of Pa infectionin mechanically
ventilated intensive care unit patients and Kenta Biotech Ltd. is conducting a Phase 2 trial for KBPA101, a monoclonal antibody against a specific Pa serotype. There are two inhaled antibiotics (Tobi® and Cayston®) that have been approved for Pa to treat CF. We are also aware of one biologic drug (Pulmozyme®) that is approved in the United States to treat respiratory problems in CF patients. KALYDECO®, a small-molecule drug that potentiates the form of the defective protein that causes CF, was approved by the FDA. VX-809 is a compound being developed by Vertex
Pharmaceuticals, Inc. in Phase 3 clinical trials for CF.

Several companies are also working on
anti-GM-CSF antibodies: Morphosys recently announced results of a Phase 1/2 trial in RA and is conducting a Phase 1 trial in multiple sclerosis (MS); Micromet (now part of Amgen) has partnered with Nycomed (now part of Takeda) in a Phase 1 trial in
RA; and MedImmune is conducting a Phase 2 trial in RA with an antibody against the GM-CSF receptor. Although we are no longer pursuing the RA indication, these competitors could nonetheless affect our market for an anti-GM-CSF antibody for severe
asthma. Many companies are developing drugs for asthma. Monoclonal antibody drug development has primarily focused on allergic asthma. Xolair®, which is co-developed by Genentech and Novartis, is currently the only monoclonal antibody that we are aware of that is approved for the treatment of severe asthma.
Genentech (Roche), MedImmune, Novartis and Pfizer each has an anti-IL-13 antibody program in Phase 2 or Phase 3 testing for asthma. Other monoclonal antibodies in development target cytokines such as IL-4, IL-5, and IL-9 or their receptors. Although
these drugs function differently, if successfully developed these drugs will compete in the asthma market.

Competition in
cancer drug development is intense, with more than 250 compounds in clinical trials by large pharmaceutical and biotechnology companies. Many of these companies are focused on targeted therapies. We anticipate that we will face intense and
increasing competition as new treatments enter the market and advanced technologies become available.

We are subject to
a multitude of manufacturing risks, any of which could substantially increase our costs and limit supply of our products.

The process of manufacturing our products is complex, highly regulated and subject to several risks, including:

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The process of manufacturing biologics, such as KB001-A, KB003, and KB004, is extremely susceptible to product loss due to contamination, equipment
failure or improper installation or operation of equipment, or vendor or operator error. Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects and other supply disruptions. If microbial,
viral or other contaminations are discovered in our products or in the manufacturing facilities in which our products are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the
contamination.

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The manufacturing facilities in which our products are made could be adversely affected by equipment failures, labor shortages, natural disasters,
power failures and numerous other factors.

We and our contract manufacturers must comply with the FDAs current Good Manufacturing Practice (cGMP) regulations and guidelines. We and our
contract manufacturers may encounter difficulties in achieving quality control and quality assurance and may experience shortages in qualified personnel. We and our contract manufacturers are subject to inspections by the FDA and comparable agencies
in other jurisdictions to confirm compliance with applicable regulatory requirements. Any failure to follow cGMP or other regulatory requirements or delay, interruption or other issues that arise in the manufacture, fill-finish, packaging, or
storage of our products as a result of a failure of our facilities or the facilities or operations of third parties to comply with regulatory requirements or pass any regulatory authority inspection could significantly impair our ability to develop
and commercialize our products, including leading to significant delays in the availability of products for our clinical studies or the termination or hold on a clinical study, or the delay or prevention of a filing or approval of marketing
applications for our product candidates. Significant noncompliance could also result in the imposition of sanctions, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approvals for our product
candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could damage our reputation. If we are not able to maintain regulatory
compliance, we may not be permitted to market our products and/or may be subject to product recalls, seizures, injunctions, or criminal prosecution.



Any adverse developments affecting manufacturing operations for our products may result in shipment delays, inventory shortages, lot failures, product
withdrawals or recalls, or other interruptions in the supply of our products. We may also have to take inventory write-offs and incur other charges and expenses for products that fail to meet specifications, undertake costly remediation efforts or
seek more costly manufacturing alternatives.

We may not be able to successfully develop and
manufacture a subcutaneous formulation of KB003.

We believe that we must develop a subcutaneous formulation of KB003
in order for such products to be commercially viable, if such product is approved. We are currently in the very early stages of developing a subcutaneous formulation and any pivotal study that we intend to rely on for purposes of seeking regulatory
approval must be conducted using the formulation that we intend to commercialize. In addition, we will need to demonstrate to the FDAs satisfaction that any subcutaneous formulation we develop may rely upon data derived from preclinical and
clinical trials using our current intravenous formulation, and the FDA may require us to conduct additional testing or even repeat some of our earlier testing. There are no assurances that we will be able to successfully develop and manufacture a
subcutaneous formulation for KB003, and even if we can, there is no guarantee that the FDA will accept this formulation. If we fail to develop and successfully manufacture a subcutaneous formulation for KB003, we may not be able to successfully
commercialize the product.

We currently rely on third party manufacturers for the supply of KB003. However, we will need to
identify a new drug product manufacturer for the further development of a subcutaneous formulation of KB003. Transitioning to a new manufacturer may result in significant expenses and devotion of our resources, and there is no guarantee that such
manufacturer will be secured, or if secured, will be able to address our ongoing manufacturing needs for the subcutaneous formulation of KB003.

If we are unable to identify a contract manufacturer for the drug substance for KB003 and enter into an agreement on a timely basis, any Phase 3 clinical trial of KB003 would be delayed.

We currently have an agreement with a contract manufacturer for the manufacture of drug substance of KB003 for our
early clinical trials. We believe we will need to secure a new contract manufacturer to satisfy our supply needs for KB003 for any Phase 3 clinical trial. We may need to devote significant expenses and resources in identifying and transitioning to a
new manufacturer and there is no assurance that such manufacturer will be identified and secured on a timely basis. If we are unable to timely secure the manufacture of the drug substance for a Phase 3 clinical trial for KB003, any such trial would
be delayed.

If any product candidate that we successfully develop does not achieve broad market
acceptance among physicians, patients, healthcare payors and the medical community, the revenue that it generates may be limited.

Even if our product candidates receive regulatory approval, they may not gain market acceptance among physicians, patients, healthcare payors, and the medical community. Coverage and reimbursement of our
product candidates by third-party payors, including government payors, generally is also necessary for commercial success. The degree of market acceptance of any approved product candidates will depend on a number of factors, including:

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the efficacy and safety as demonstrated in clinical trials;

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the clinical indications for which the product candidate is approved;

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acceptance by physicians, major operators of hospitals and clinics, and patients of the product candidate as a safe and effective treatment;

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the potential and perceived advantages of product candidates over alternative treatments;

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the safety of product candidates seen in a broader patient group, including its use outside the approved indications;

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the cost of treatment in relation to alternative treatments;

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the availability of adequate reimbursement and pricing by third parties and government authorities;

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relative convenience and ease of administration;

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the prevalence and severity of adverse events;

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the effectiveness of our sales and marketing efforts; and

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unfavorable publicity relating to the product candidate.

If any product candidate is approved but does not achieve an adequate level of acceptance by physicians, hospitals, healthcare payors, and patients, we may not generate sufficient revenue from that
product candidate and may not become or remain profitable.

Reimbursement may be limited or unavailable in certain
market segments for our product candidates, which could make it difficult for us to sell our product candidates profitably.

Market acceptance and sales of our product candidates will depend significantly on the availability of adequate insurance coverage and reimbursement from third-party payors for any of our product
candidates and may be affected by existing and future health care reform measures. Government authorities and third-party payors, such as private health insurers and health maintenance organizations, decide which drugs they will pay for and
establish reimbursement levels. Reimbursement by a third-party payor may depend upon a number of factors including the third-party payors determination that use of a product candidate is:

Obtaining coverage and reimbursement approval for a product candidate from a government or
other third-party payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical, and cost effectiveness data for the use of our product candidates to the payor. We may not be able to provide data
sufficient to gain acceptance with respect to coverage and reimbursement. We cannot be sure that coverage or adequate reimbursement will be available for any of our product candidates. Also, we cannot be sure that reimbursement amounts will not
reduce the demand for, or the price of, our product candidates. If reimbursement is not available or is available only to limited levels, we may not be able to commercialize certain of our product candidates profitably, or at all, even if approved.

In the United States and in certain foreign jurisdictions, there have been a number of legislative and regulatory changes to
the health care system that could affect our ability to sell our product candidates profitably. In particular, the Medicare Modernization Act of 2003 revised the payment methods for many product candidates under Medicare. This has resulted in lower
rates of reimbursement. There have been numerous other federal and state initiatives designed to reduce payment for pharmaceuticals.

As a result of legislative proposals and the trend toward managed health care in the United States, third-party payors are increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement of new drugs. They may also refuse to provide coverage of approved product candidates for medical indications other than those for which the FDA has granted market approvals. As a result, significant uncertainty exists
as to whether and how much third-party payors will reimburse patients for their use of newly approved drugs, which in turn will put pressure on the pricing of drugs. We expect to experience pricing pressures in connection with the sale of our
product candidates due to the trend toward managed health care, the increasing influence of health maintenance organizations, and additional legislative proposals as well as country, regional, or local healthcare budget limitations.

If we are unable to establish sales and marketing capabilities or fail to enter into agreements with third parties to market and
sell any product candidates we may successfully develop, we may not be able to effectively market and sell any such product candidates.

We do not currently have any infrastructure for the sale, marketing, and distribution of any of our product candidates once approved, if at all, and we must build this infrastructure or make arrangements
with third parties to perform these functions in order to commercialize any product candidates for which we may obtain approval. The establishment and development of a sales force, either by us or jointly with a development partner, or the
establishment of a contract sales force to market any product candidates we may develop will be expensive and time consuming and could delay any product candidate launch. If we, Sanofi, or any of our future development partners are unable to
establish sales and marketing capabilities or any other nontechnical capabilities necessary to commercialize any product candidates we may successfully develop, we will need to contract with third parties to market and sell such product candidates.
We may not be able to establish arrangements with third parties on acceptable terms, if at all.

If we are not
successful in discovering, developing, acquiring and commercializing additional product candidates, our ability to expand our business will be limited.

A substantial amount of our effort is focused on the continued clinical testing and potential approval of our current product candidates and expanding our product candidates to serve other indications of
high unmet medical needs. Research programs to identify other indications require substantial technical, financial and human resources, whether or not any product candidates for other indications are ultimately identified. Our research programs may
initially show promise in identifying potential product candidates, yet fail to yield product candidates for clinical development for many reasons, including the following:

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the research methodology used may not be successful in identifying potential product candidates;

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competitors may develop alternatives that render our product candidates obsolete or less attractive;

product candidates we develop may nevertheless be covered by third parties patents or other exclusive rights;

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a product candidate may on further study be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective or
otherwise does not meet applicable regulatory criteria;

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a product candidate may not be capable of being produced in commercial quantities at an acceptable cost, or at all; and

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a product candidate may not be accepted as safe and effective by patients, the medical community or third-party payors, if applicable.

In addition, while our agreement with Sanofi remains in effect, neither we nor our affiliates may develop
or commercialize any other anti-Pa antibody. This would apply to a future acquiror, except with respect to any antiPa antibody of the acquiror existing on the date of acquisition and developed thereafter.

If we do not successfully develop and commercialize product candidates for other indications, our business and future prospects may be
limited and our business will be more vulnerable to problems that we encounter in developing and commercializing our current product candidates.

If we are acquired by a pharmaceutical company with a significant market capitalization, Sanofi may exercise an option to exclusively assume all aspects of development and commercialization of
licensed products in Pa-infected patients with CF or bronchiectasis worldwide, in which case the revenue we would generate from those licensed products would be limited.

Under our license and collaboration agreement with Sanofi, if we are acquired by a top 25 pharmaceutical company based on market
capitalization at the time of such acquisition, Sanofi has the option to exclusively assume all aspects of development and commercialization of licensed products to treat Pa-infected patients with CF or bronchiectasis worldwide. If Sanofi
exercises this option, our rights to participate in development and commercialization of the licensed products in Pa-infected patients with CF or bronchiectasis would terminate and the revenue generated from the commercialization of those
licensed products would be limited to the amounts Sanofi would be required to pay pursuant to its agreement with us. This provision may adversely impact a companys desire to acquire us.

If we fail to attract and retain key management and clinical development personnel, we may be unable to successfully develop or
commercialize our product candidates.

We will need to expand and effectively manage our managerial, operational,
financial, and other resources in order to successfully pursue our clinical development and commercialization efforts. As a company with a limited number of personnel, we are highly dependent on the development, regulatory, commercial, and financial
expertise of the members of our senior management, in particular David W. Pritchard, our president and chief executive officer, and Geoffrey T. Yarranton, our executive vice president, research and development, and chief scientific officer. The loss
of such individuals or the services of any of our other senior management could delay or prevent the further development and potential commercialization of our product candidates and, if we are not successful in finding suitable replacements, could
harm our business. Our former chief medical officer resigned in February 2012, and it took us three months to hire our current chief medical officer in May 2012. Our success also depends on our continued ability to attract, retain, and motivate
highly qualified management and scientific personnel and we may not be able to do so in the future due to intense competition among biotechnology and pharmaceutical companies, universities, and research organizations for qualified personnel. If we
are unable to attract and retain the necessary personnel, we may experience significant impediments to our ability to implement our business strategy.

If we fail to effectively integrate our new executive officers into our organization,
the future development and commercialization of our product candidates may suffer, harming future regulatory approvals, sales of our product candidates or our results of operations.

Our chief medical officer joined us in May 2012, and our chief financial officer joined us in July 2012. As a result, certain members of
our executive team have not worked together as a group for a significant period of time. Our future performance will depend, in part, on our ability to successfully integrate our newly hired executive officers into our management team and our
ability to develop an effective working relationship among senior management. Our failure to integrate these individuals and create effective working relationships among them and other members of management could result in inefficiencies in the
development and commercialization of our product candidates, harming future regulatory approvals, sales of our product candidates and our results of operations.

We face potential product liability exposure and, if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

The use of our product candidates in clinical trials and the sale of any product candidates for which we may obtain
marketing approval expose us to the risk of product liability claims. Product liability claims may be brought against us, Sanofi, or any of our future development partners by participants enrolled in our clinical trials, patients, health care
providers, or others using, administering, or selling our product candidates. If we cannot successfully defend ourselves against any such claims, we would incur substantial liabilities. Regardless of merit or eventual outcome, product liability
claims may result in:

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withdrawal of clinical trial participants;

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termination of clinical trial sites or entire trial programs;

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costs of related litigation;

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substantial monetary awards to trial participants or other claimants;

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decreased demand for our product candidates and loss of revenue;

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impairment of our business reputation;

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diversion of management and scientific resources from our business operations; and

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the inability to commercialize our product candidates.

We have obtained limited product liability insurance coverage for our clinical trials domestically and in selected foreign countries where we are conducting clinical trials. Our coverage is currently
limited to $10 million per occurrence and $10 million in the aggregate per year. As such, our insurance coverage may not reimburse us or may not be sufficient to reimburse us for any expenses or losses we may suffer. Moreover, insurance coverage is
becoming increasingly expensive and in the future we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to product liability. We intend to expand our insurance coverage for
product candidates to include the sale of commercial products if we obtain marketing approval for our product candidates in development; however, we may be unable to obtain commercially reasonable product liability insurance for any product
candidates approved for marketing. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us, particularly if judgments
exceed our insurance coverage, could decrease our working capital and adversely affect our business.

Our insurance policies are expensive and protect us only from some business risks,
which leaves us exposed to significant uninsured liabilities.

We do not carry insurance for all categories of risk
that our business may encounter. For example, we do not carry earthquake insurance. In the event of a major earthquake in our region, our business could suffer significant and uninsured damage and loss. Some of the policies we currently maintain
include general liability, employment practices liability, property, auto, workers compensation, products liability, and directors and officers insurance. We do not know, however, if we will be able to maintain existing insurance
with adequate levels of coverage. Any significant, uninsured liability may require us to pay substantial amounts, which would adversely affect our working capital and results of operations.

Our employees may engage in misconduct or other improper activities including noncompliance with regulatory standards and
requirements and insider trading.

We are exposed to the risk of employee fraud or other misconduct. Misconduct by
employees could include intentional failures to comply with FDA regulations, provide accurate information to regulatory authorities, comply with manufacturing standards we have established, comply with federal and state health care fraud and abuse
laws and regulations, report financial information or data accurately, or disclose unauthorized activities to us. In particular, sales, marketing, and business arrangements in the health care industry are subject to extensive laws and regulations
intended to prevent fraud, kickbacks, self-dealing, and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and
other business arrangements. Employee misconduct could also involve improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our reputation.

In addition, during the course of our operations our directors, executives, and employees may have access to material, nonpublic
information regarding our business, our results of operations, or potential transactions we are considering. We may not be able to prevent a director, executive, or employee from trading in our common stock on the basis of, or while having access
to, material, nonpublic information. If a director, executive, or employee was to be investigated or an action was to be brought against a director, executive, or employee for insider trading, it could have a negative impact on our reputation and
our stock price. Such a claim, with or without merit, could also result in substantial expenditures of time and money, and divert attention of our management team from other tasks important to the success of our business.

We may encounter difficulties in managing our growth and expanding our operations successfully.

As we seek to advance our product candidates through clinical trials we will need to expand our development, regulatory, manufacturing,
marketing, and sales capabilities, collaborate with Sanofi and contract with third parties to provide these capabilities for us. As our operations expand we expect that we will need to manage additional relationships with various development
partners, suppliers, and other third parties. Future growth will impose significant added responsibilities on members of management. Our future financial performance and our ability to commercialize our product candidates and to compete effectively
will depend in part on our ability to manage any future growth effectively. To that end, we must be able to manage our development efforts and clinical trials effectively. We may not be able to accomplish these tasks and our failure to accomplish
any of them could prevent us from successfully growing our company.

In September 2012, we entered into a loan and
security agreement with MidCap Financial and drew down $5.0 million under the facility. In December 2012, we drew down an additional $5.0 million under the facility. The agreement contains various covenants that limit our ability to engage in
specified types of transactions. These covenants limit our ability to, among other things:

A breach of any of these covenants or a material adverse change to our business, operations, or condition (financial or otherwise) could result in a default under the loan. In the case of a continuing
event of default under the loan, MidCap Financial could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit, commence and prosecute bankruptcy and/or other insolvency
proceedings, or proceed against the collateral granted to MidCap Financial under the loan. Amounts outstanding under the term loan are secured by all of our existing and future assets (excluding intellectual property, which is subject to a negative
pledge arrangement). A default and any accompanying repayment could have a material adverse effect on our business, operating results and financial condition.

We and our development partner, third-party manufacturers and suppliers use biological materials and may use hazardous materials, and any claims relating to improper handling, storage, or disposal
of these materials could be time consuming or costly.

We and our development partner, third-party manufacturers and
suppliers may use hazardous materials, including chemicals and biological agents and compounds that could be dangerous to human health and safety or the environment. Our operations and the operations of our development partner, third-party
manufacturers and suppliers also produce hazardous waste products. Federal, state, and local laws and regulations govern the use, generation, manufacture, storage, handling, and disposal of these materials and wastes. Compliance with applicable
environmental laws and regulations may be expensive and current or future environmental laws and regulations may impair our product development efforts. In addition, we cannot entirely eliminate the risk of accidental injury or contamination from
these materials or wastes. We do not carry specific biological or hazardous waste insurance coverage and our property, casualty, and general liability insurance policies specifically exclude coverage for damages and fines arising from biological or
hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury we could be held liable for damages or be penalized with fines in an amount exceeding our resources, and our clinical trials or regulatory approvals
could be suspended.

Our internal computer systems, or those of our development partner, third-party clinical research
organizations or other contractors or consultants, may fail or suffer security breaches, which could result in a material disruption of our product development programs.

Despite the implementation of security measures, our internal computer systems and those of our development partner, third-party clinical
research organizations and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters, terrorism, war, and telecommunication and electrical failures. While we have not experienced any
such system failure, accident, or security breach to date, if such an event were to occur and cause interruptions in our operations, it could result in a material disruption of our programs. For example, the loss of clinical trial data for any of
our product candidates could result in delays in our regulatory approval efforts and significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach results in a loss of or damage to our data
or applications or other data or applications relating to our technology or product candidates, or inappropriate disclosure of confidential or proprietary information, we could incur liabilities and the further development of our product candidates
could be delayed.

There have been, and likely will continue to be, legislative and regulatory proposals at the federal and
state levels directed at broadening the availability of health care and containing or lowering the cost of health care. We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance
companies, managed care organizations, and other payors of healthcare services to contain or reduce costs of health care may adversely affect:

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the demand for any drug products for which we may obtain regulatory approval;

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our ability to set a price that we believe is fair for our product candidates;

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our ability to generate revenue and achieve or maintain profitability;

We intend to seek approval to market our future product candidates in both the United States and in foreign jurisdictions. If we obtain approval in one or more foreign jurisdictions, we will be subject to
rules and regulations in those jurisdictions relating to our product candidates. In some foreign countries, particularly in the European Union, the pricing of prescription pharmaceuticals and biologics is subject to governmental control. In these
countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product candidate. If reimbursement of our future products is unavailable or limited in scope or amount, or if
pricing is set at unsatisfactory levels, we may be unable to achieve or sustain profitability.

We, Sanofi, and any of
our future development partners will be required to report to regulatory authorities if any of our approved products cause or contribute to adverse medical events, and any failure to do so would result in sanctions that would materially harm our
business.

If we, Sanofi, and any of our future development partners are successful in commercializing our products,
the FDA and foreign regulatory authorities would require that we, Sanofi, and any of our future development partners report certain information about adverse medical events if those products may have caused or contributed to those adverse events.
The timing of our obligation to report would be triggered by the date we become aware of the adverse event as well as the nature of the event. We, Sanofi, and any of our future development partners may fail to report adverse events we become aware
of within the prescribed timeframe. We, Sanofi, and any of our future development partners may also fail to appreciate that we have become aware of a reportable adverse event, especially if it is not reported to us as an adverse event or if it is an
adverse event that is unexpected or removed in time from the use of our products. If we, Sanofi, and any of our future development partners fail to comply with our reporting obligations, the FDA or a foreign regulatory authority could take action
including criminal prosecution, the imposition of civil monetary penalties, seizure of our products, or delay in approval or clearance of future products.

Our product candidates for which we and our development partner intend to seek approval as biologic products may face competition sooner than anticipated.

With the enactment of the Biologics Price Competition and Innovation Act of 2009 (BPCIA) as part of the Affordable Care Act, an
abbreviated pathway for the approval of biosimilar and interchangeable biological products was created. The abbreviated regulatory pathway establishes legal authority for the FDA to review and approve biosimilar biologics, including the possible
designation of a biosimilar as interchangeable based on its similarity to an existing brand product. Under the BPCIA, an application for a biosimilar product cannot be approved by the FDA until 12 years after the original branded product
was approved under a BLA. The law is complex and is still being interpreted and implemented by the FDA. As a result, its ultimate impact,

implementation, and meaning are subject to uncertainty. While it is uncertain when such processes intended to implement BPCIA may be fully adopted by the FDA, any such processes could have a
material adverse effect on the future commercial prospects for our biological products.

We believe that any of our product
candidates approved as a biological product under a BLA should qualify for the 12-year period of exclusivity. However, there is a risk that the FDA will not consider our product candidates to be reference products for competing products, potentially
creating the opportunity for generic competition sooner than anticipated. Moreover, the extent to which a biosimilar, once approved, will be substituted for any one of our reference products in a way that is similar to traditional generic
substitution for non-biological products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.

In addition, foreign regulatory authorities may also provide for exclusivity periods for approved biological products. For example, biological products in Europe may be eligible for a 10-year period of
exclusivity. However, biosimilar products have been approved under a sub-pathway of the centralized procedure since 2006. The pathway allows sponsors of a biosimilar product to seek and obtain regulatory approval based in part on the clinical trial
data of an originator product to which the biosimilar product has been demonstrated to be similar. In many cases, this allows biosimilar products to be brought to market without conducting the full suite of clinical trials typically
required of originators. It is unclear whether we and our development partner would face competition to our products in European markets sooner than anticipated.

We may in the future be subject to various U.S. federal and state laws pertaining to health care fraud and abuse, including anti-kickback, self-referral, false claims and fraud laws, and any
violations by us of such laws could result in fines or other penalties.

If one or more of our product candidates is
approved, we will likely be subject to the various U.S. federal and state laws intended to prevent health care fraud and abuse. The federal anti-kickback statute prohibits the offer, receipt, or payment of remuneration in exchange for or to induce
the referral of patients or the use of products or services that would be paid for in whole or part by Medicare, Medicaid or other federal health care programs. Remuneration has been broadly defined to include anything of value, including cash,
improper discounts, and free or reduced price items and services. Many states have similar laws that apply to their state health care programs as well as private payors. Violations of the anti-kickback laws can result in exclusion from federal
health care programs and substantial civil and criminal penalties.

The False Claims Act (FCA), imposes liability on persons
who, among other things, present or cause to be presented false or fraudulent claims for payment by a federal health care program. The FCA has been used to prosecute persons submitting claims for payment that are inaccurate or fraudulent, that are
for services not provided as claimed, or for services that are not medically necessary. The FCA includes a whistleblower provision that allows individuals to bring actions on behalf of the federal government and share a portion of the recovery of
successful claims. If our marketing or other arrangements were determined to violate the FCA or anti-kickback or related laws, then our revenue could be adversely affected, which would likely harm our business, financial condition, and results of
operations.

State and federal authorities have aggressively targeted medical technology companies for alleged violations of
these anti-fraud statutes, based on improper research or consulting contracts with doctors, certain marketing arrangements that rely on volume-based pricing, off-label marketing schemes, and other improper promotional practices. Companies targeted
in such prosecutions have paid substantial fines in the hundreds of millions of dollars or more, have been forced to implement extensive corrective action plans or Corporate Integrity Agreements, and have often become subject to consent decrees
severely restricting the manner in which they conduct their business. If we become the target of such an investigation or prosecution based on our contractual relationships with providers or institutions, or our marketing and promotional practices,
we could face similar sanctions, which would materially harm our business.

Also, the Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally
prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. We cannot assure you that our internal control policies and procedures will protect us from reckless
or negligent acts committed by our employees, future distributors, partners, collaborators or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties, or prosecution and have a negative impact on our
business, results of operations and reputation.

Legislative or regulatory healthcare reforms in the United States may
make it more difficult and costly for us to obtain regulatory approval of our product candidates and to produce, market, and distribute our products after approval is obtained.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing
the regulatory approval, manufacture, and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and
our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of our current product candidates or any future product candidates. We cannot determine what effect
changes in regulations, statutes, legal interpretation or policies, when and if promulgated, enacted or adopted may have on our business in the future. Such changes could, among other things, require:

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changes to manufacturing methods;

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additional studies, including clinical studies;

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recall, replacement, or discontinuance of one or more of our products; and

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additional record keeping.

Each of these would likely entail substantial time and cost and could materially harm our business and our financial results. In addition, delays in receipt of or failure to receive regulatory approvals
for any future products would harm our business, financial condition, and results of operations.

Even if we are able to
obtain regulatory approval for our product candidates, we will continue to be subject to ongoing and extensive regulatory requirements, and our failure to comply with these requirements could substantially harm our business.

If we receive regulatory approval for our product candidates, we will be subject to ongoing FDA obligations and continued regulatory
oversight and review, such as continued safety reporting requirements, and we may also be subject to additional FDA post-marketing obligations. If we are not able to maintain regulatory compliance, we may not be permitted to market our product
candidates and/or may be subject to product recalls or seizures.

If the FDA approves any of our product candidates, the
labeling, packaging, adverse event reporting, storage, advertising, promotion and record-keeping for our products will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the products,
including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of the product, and could include withdrawal of the product from the market.

We have incurred substantial losses during our history and do not expect to become profitable in the foreseeable future and may never
achieve profitability. To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any, until such unused losses expire. We may be unable to use these losses to offset income before
such unused losses expire. Under Section 382 of the Internal Revenue Code, if a corporation undergoes an ownership change (generally defined as a greater than 50%

change (by value) in its equity ownership over a three year period), the corporations ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to
offset its post-change income may be limited. We have in the past experienced ownership changes that have resulted in limitations on the use of a portion of our net operating loss carryforwards. If we experience further ownership changes our ability
to utilize our net operating loss carryforwards could be further limited.

Risks Related to Our Dependence on Third Parties

We are dependent on Sanofi for the development and commercialization of KB001-A, and Sanofis failure to develop and/or
commercialize KB001-A would result in a material adverse effect on our business and operating results.

We have granted
Sanofi an exclusive license to KB001, KB001-A and other antibodies directed against the PcrV protein of Pa for all indications for most aspects of their development and commercialization. Our development partnership with Sanofi on KB001-A or
other antibodies may not be scientifically, medically, or commercially successful due to a number of important factors, including the following:

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Sanofis obligation to use diligent efforts under our agreement leaves Sanofi with significant discretion in determining the efforts
and resources that it will apply to the development and commercialization of KB001-A or other antibodies directed against the PcrV protein of Pa. The timing and amount of any contingent and royalty payments we may receive under our agreement
will depend on, among other things, the efforts, allocation of resources, and successful development and commercialization of our product candidate by Sanofi under our agreement;

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Sanofi holds the rights to commercialize KB001-A, including for Pa in CF and bronchiectasis patients, and holds an option to assume primary
responsibility for developing and promoting KB001-A for such indications. Sanofi may not choose to exercise its option to develop and promote KB001-A or other licensed products in Pa-infected patients with CF or bronchiectasis and has no
contractual obligation to do so. If Sanofi does not exercise its option for the CF or bronchiectasis indications, Sanofi will nevertheless retain the exclusive right to perform certain necessary commercial activities (including the exclusive right
to sell and distribute KB001-A) with respect to such indications but will have no obligation to perform such activities. In such event, if Sanofi were to decide not to commercialize KB001-A for the CF or bronchiectasis indications, and we
nevertheless wished to commercialize KB001-A for either of these indications if approved, we would need to renegotiate with Sanofi certain terms of our agreement but may be unable to do so on reasonable terms, in a timely manner, or at all;

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Sanofi may develop and commercialize, either alone or with others, product candidates that are similar to or competitive with KB001-A or other
antibodies directed against the PcrV protein of Pa for the indications that we are targeting for KB001-A;

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Sanofi may change the focus of its development and commercialization efforts or pursue higher-priority programs;

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Sanofi may not make timely regulatory submissions for KB001-A;

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subject to our promotional rights in the CF or bronchiectasis indications, Sanofi will have substantial control over the commercialization of KB001-A
and other antibodies directed against the PcrV protein of Pa for all indications, including in CF or bronchiectasis patients, whether or not Sanofi chooses to exercise its option to develop KB001-A for such indications. Sanofis
commercialization objectives for different indications may not be consistent with our goals and there can be no assurance that Sanofi will want to commercialize KB001-A or other antibodies directed against the PcrV protein of Pa in a manner
that maximizes our revenue. In addition, we may find that we cannot reach agreement over some of the development and commercialization aspects of KB001-A or other antibodies directed against the PcrV protein of Pa, resulting in program
delays, termination, or other decisions that might have a material impact on our business;

Sanofi may fail to manufacture or supply sufficient drug substance of KB001-A for our clinical use, such as our CF study, which could result in program
delays;

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Sanofi may fail to manufacture or supply sufficient drug substance of KB001-A for our commercial use, if approved, which could result in lost revenue;

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we and Sanofi may fail to agree on the specific terms of a profit sharing arrangement within the United States for the CF indication in the event that
Sanofi elects the shared U.S. territory option;

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Sanofi may utilize our intellectual property rights or take actions related to licensed products in such a way as to invite litigation that could
jeopardize or invalidate our intellectual property rights or expose us to potential liability;

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if we are acquired by a pharmaceutical company with a significant market capitalization, Sanofi may exercise its option to exclusively assume all
aspects of development and commercialization of licensed products in Pa-infected CF and bronchiectasis patients worldwide;

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Sanofi may not comply with all applicable regulatory requirements or may fail to report safety data in accordance with all applicable regulatory
requirements;

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Sanofi may terminate the agreement with us for convenience upon 180 days prior written notice;

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if Sanofi were to breach or terminate the agreement with us, the development and commercialization of KB001-A or other antibodies directed against the
PcrV protein of Pa could be delayed. We would need to either use our own resources and capabilities to continue the development and commercialization of KB001-A or grant rights to another development or commercial partner;

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if Sanofi were to terminate its arrangements with us, our potential revenue under our agreement with Sanofi, including from potential development and
commercial contingent payments and royalties on net sales of licensed products, would be significantly reduced; and

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Sanofi may not dedicate the resources that would be necessary to carry the product candidate through clinical development or may not obtain the
necessary regulatory approvals.

Sanofis failure to develop or effectively commercialize KB001-A or
other antibodies directed against the PcrV protein of Pa would result in a material adverse effect on our business and results of operations and would likely cause our stock price to decline.

We rely on third parties to conduct our clinical trials. If these third parties do not meet our deadlines or otherwise conduct the
trials as required, our clinical development programs could be delayed or unsuccessful and we may not be able to obtain regulatory approval for or commercialize our product candidates when expected or at all.

We do not have the ability to conduct all aspects of our preclinical testing or clinical trials ourselves. We are dependent on Sanofi to
conduct the Phase 2 and Phase 3 clinical trials for KB001-A for the prevention of Pa VAP and, therefore, the timing of the initiation and completion of these trials is controlled by Sanofi and may occur on substantially different timing from
our estimates. We also use CROs to conduct our clinical trials and rely on medical institutions, clinical investigators, CROs, and consultants to conduct our trials in accordance with our clinical protocols and regulatory requirements. Our CROs,
investigators, and other third parties play a significant role in the conduct of these trials and subsequent collection and analysis of data.

There is no guarantee that any CROs, investigators, or other third parties on which we rely for administration and conduct of our clinical trials will devote adequate time and resources to such trials or
perform as contractually required. If any of these third parties fails to meet expected deadlines, fails to adhere to our clinical protocols, or otherwise performs in a substandard manner, our clinical trials may be extended, delayed, or terminated.
If any of our clinical trial sites terminates for any reason, we may experience the loss of follow-up information on subjects enrolled in our ongoing clinical trials unless we are able to transfer those subjects to

another qualified clinical trial site. In addition, principal investigators for our clinical trials may serve as scientific advisors or consultants to us from time to time and may receive cash or
equity compensation in connection with such services. If these relationships and any related compensation result in perceived or actual conflicts of interest, the integrity of the data generated at the applicable clinical trial site may be
jeopardized.

We rely completely on third parties, most of which are sole source suppliers, to supply drug substance and
manufacture drug product for our clinical trials and preclinical studies and intend to rely on other third parties to produce commercial supplies of product candidates, and our dependence on third parties could adversely impact our business.

We are completely dependent on third-party suppliers, most of which are sole source suppliers of the drug substance
and drug product for our product candidates. If these third-party suppliers do not supply sufficient quantities for product candidates to us on a timely basis and in accordance with applicable specifications and other regulatory requirements, there
could be a significant interruption of our supplies, which would adversely affect clinical development of the product candidate. Furthermore, if any of our contract manufacturers cannot successfully manufacture material that conforms to our
specifications and with regulatory requirements, we will not be able to secure and/or maintain regulatory approval, if any, for our product candidates.

We will also rely on our contract manufacturers to purchase from third-party suppliers the materials necessary to produce our product candidates for our anticipated clinical trials. There are a small
number of suppliers for certain capital equipment and raw materials used to manufacture our product candidates. We do not have any control over the process or timing of the acquisition of these raw materials by our contract manufacturers. Moreover,
we currently do not have agreements in place for the commercial production of these raw materials. Any significant delay in the supply of a product candidate or the raw material components thereof for an ongoing clinical trial could considerably
delay completion of that clinical trial, product candidate testing, and potential regulatory approval of that product candidate.

We do not expect to have the resources or capacity to commercially manufacture any of our proposed product candidates if approved, and will likely continue to be dependent on third-party manufacturers.
Our dependence on third parties to manufacture and supply us with clinical trial materials and any approved product candidates may adversely affect our ability to develop and commercialize our product candidates on a timely basis.

We may not be successful in establishing and maintaining additional development partnerships, which could adversely affect our
ability to develop and commercialize product candidates.

In addition to our current development partnership with
Sanofi, a part of our strategy is to enter into additional development partnerships in the future, including collaborations with major biotechnology or pharmaceutical companies. We face significant competition in seeking appropriate development
partners and the negotiation process is time consuming and complex. Moreover, we may not be successful in our efforts to establish a development partnership or other alternative arrangements for any of our other existing or future product candidates
and programs because our research and development pipeline may be insufficient, our product candidates and programs may be deemed to be at too early a stage of development for collaborative effort and/or third parties may not view our product
candidates and programs as having the requisite potential to demonstrate safety and efficacy. Even if we are successful in our efforts to establish new development partnerships, the terms that we agree upon may not be favorable to us and we may not
be able to maintain such development partnerships if, for example, development or approval of a product candidate is delayed or sales of an approved product candidate are disappointing. Any delay in entering into new development partnership
agreements related to our product candidates could delay the development and commercialization of our product candidates and reduce their competitiveness if they reach the market.

Our commercial success depends in part on our ability to obtain and maintain patent protection and trade secret protection for our product candidates, proprietary technologies, and their uses as well as
our ability to operate without infringing upon the proprietary rights of others. There can be no assurance that our patent applications or those of our licensors will result in additional patents being issued or that issued patents will afford
sufficient protection against competitors with similar technology, nor can there be any assurance that the patents issued will not be infringed, designed around, or invalidated by third parties. Even issued patents may later be found unenforceable
or may be modified or revoked in proceedings instituted by third parties before various patent offices or in courts. The degree of future protection for our proprietary rights is uncertain. Only limited protection may be available and may not
adequately protect our rights or permit us to gain or keep any competitive advantage. This failure to properly protect the intellectual property rights relating to these product candidates could have a material adverse effect on our financial
condition and results of operations.

Composition-of-matter patents on the biological or chemical active pharmaceutical
ingredient are generally considered to be the strongest form of intellectual property protection for pharmaceutical products, as such patents provide protection without regard to any method of use. We cannot be certain that the claims in our patent
applications covering composition-of-matter of our product candidates will be considered patentable by the U.S. Patent and Trademark Office (USPTO) and courts in the United States or by the patent offices and courts in foreign countries, nor can we
be certain that the claims in our issued composition-of-matter patents will not be found invalid or unenforceable if challenged. Method-of-use patents protect the use of a product for the specified method. This type of patent does not prevent a
competitor from making and marketing a product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if competitors do not actively promote their product for our targeted indications,
physicians may prescribe these products off-label. Although off-label prescriptions may infringe or contribute to the infringement of method-of-use patents, the practice is common and such infringement is difficult to prevent or
prosecute.

The patent application process is subject to numerous risks and uncertainties, and there can be no assurance that
we, Sanofi, or any of our future development partners will be successful in protecting our product candidates by obtaining and defending patents. These risks and uncertainties include the following:

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the USPTO and various foreign governmental patent agencies require compliance with a number of procedural, documentary, fee payment and other
provisions during the patent process. There are situations in which noncompliance can result in abandonment or lapse of a patent or patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an
event, competitors might be able to enter the market earlier than would otherwise have been the case;

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patent applications may not result in any patents being issued;

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patents that may be issued or in-licensed may be challenged, invalidated, modified, revoked, circumvented, found to be unenforceable, or otherwise may
not provide any competitive advantage;

our competitors, many of whom have substantially greater resources than we do and many of whom have made significant investments in competing
technologies, may seek or may have already obtained patents that will limit, interfere with, or eliminate our ability to make, use, and sell our potential product candidates;

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there may be significant pressure on the U.S. government and international governmental bodies to limit the scope of patent protection both inside and
outside the United States for disease treatments that prove successful, as a matter of public policy regarding worldwide health concerns; and

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countries other than the United States may have patent laws less favorable to patentees than those upheld by U.S. courts, allowing foreign competitors
a better opportunity to create, develop, and market competing product candidates.

Furthermore, we and our development partners rely on the protection of our trade secrets and proprietary know-how.
For example, we rely on Novartis, to whom we have licensed our Humaneered® platform, to protect our trade
secrets and proprietary know-how that has been licensed to them. Although we have taken steps to protect our trade secrets and unpatented know-how, including entering into confidentiality agreements with third parties, and confidential information
and inventions agreements with employees, consultants, and advisors, third parties may still obtain this information or may come upon this or similar information independently. If any of these events occurs or if we otherwise lose protection for our
trade secrets or proprietary know-how, the value of this information may be greatly reduced.

Additionally, in the U.S., the
central provisions of the Leahy-Smith America Invents Act (AIA) became effective on March 16, 2013. Among other things, this law will switch U.S. patent rights from the present first-to-invent system to a first
inventor-to-file system. This may result in inventors and companies having to file patent applications more frequently to preserve rights in their inventions. This may favor larger competitors that have greater resources to file more patent
applications.

If our trademarks and trade names are not adequately protected, then we may not be able to build name
recognition in our markets of interest and our business may be adversely affected.

Our registered or unregistered
trademarks or trade names may be challenged, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build name
recognition by potential partners or customers in our markets of interest. Over the long term, if we are unable to establish name recognition based on our trademarks and trade names, then we may not be able to compete effectively and our business
may be adversely affected.

If we, Sanofi, or any of our future development partners are sued for infringing
intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our business.

Our success also depends on our ability and the ability of Sanofi and any of our future development partners to develop, manufacture,
market, and sell our product candidates without infringing upon the proprietary rights of third parties. Numerous U.S.-issued and foreign-issued patents and pending patent applications owned by third parties exist in the fields in which we are
developing product candidates, some of which may contain claims that overlap with the subject matter of our intellectual property or are directed at our product candidates. When we become aware of patents held by third parties that may implicate the
manufacture, development or commercialization of our product candidates, we evaluate our need to license rights to such patents. For example, we have entered into several licenses for the right to use third-party intellectual property, including
with the UCSF and the LICR. If we need to license rights from third parties to manufacture, develop or commercialize our product candidates, there can be no assurance that we will be able to obtain a license on commercially reasonable terms or at
all.

Because patent applications can take many years to issue there may be currently pending applications, unknown to us,
that may later result in issued patents upon which our product candidates or proprietary technologies may infringe. Similarly, there may be issued patents relevant to our product candidates of which we are not aware.

There is a substantial amount of litigation involving patent and other intellectual
property rights in the biotechnology and pharmaceutical industries generally. If a third party claims that we or any of our licensors, suppliers, or development partners infringe upon a third partys intellectual property rights, we may have
to:



seek to obtain licenses that may not be available on commercially reasonable terms, if at all;

pay substantial damages including, in an exceptional case, treble damages and attorneys fees, which we may have to pay if a court decides that
the product candidate or proprietary technology at issue infringes upon or violates the third partys rights;

defend litigation or administrative proceedings that may be costly whether we win or lose, and which could result in a substantial diversion of our
financial and management resources.

Any such claims against us could also be deemed to constitute an event
of default under our loan and security agreement with MidCap Financial. In the case of a continuing event of default under the loan, MidCap Financial could elect to declare all amounts outstanding to be immediately due and payable and terminate all
commitments to extend further credit, commence and prosecute bankruptcy and/or other insolvency proceedings, or proceed against the collateral granted to MidCap Financial under the loan.

We may be involved in lawsuits to protect or enforce our patents or the patents of our licensors, which could be expensive, time
consuming and unsuccessful.

Competitors may infringe upon our patents or the patents of our licensors. To counter
infringement or unauthorized use, we may be required to file infringement claims, which can be expensive and time consuming. An adverse result in any litigation or defense proceedings could put one or more of our patents at risk of being
invalidated, found to be unenforceable, or interpreted narrowly and could put our patent applications at risk of not issuing. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation,
there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.

Most of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to
sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary to continue our clinical trials, continue
our internal research programs, in-license needed technology, or enter into development partnerships that would help us bring our product candidates to market.

In addition, any future patent litigation, interference, or other administrative proceedings will result in additional expense and distraction of our personnel. An adverse outcome in such litigation or
proceedings may expose us, Sanofi or any of our future development partners to loss of our proprietary position, expose us to significant liabilities, or require us to seek licenses that may not be available on commercially acceptable terms, if at
all.

Our issued patents could be found invalid or unenforceable if challenged in court.

If we, Sanofi, or any of our future development partners were to initiate legal proceedings against a third party to enforce a patent
covering one of our product candidates, or one of our future product candidates, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United

States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory
requirements, including lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the USPTO, or made a
misleading statement, during prosecution. Third parties may also raise similar claims before the USPTO, even outside the context of litigation. The outcome following legal assertions of invalidity and unenforceability is unpredictable. With respect
to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or
unenforceability, we would lose at least part, and perhaps all, of the patent protection on such product candidate. Such a loss of patent protection would have a material adverse impact on our business.

We may fail to comply with any of our obligations under existing agreements pursuant to which we license rights or technology,
which could result in the loss of rights or technology that are material to our business.

We are a party to technology
licenses that are important to our business and we may enter into additional licenses in the future. We currently hold licenses from the Medical College of Wisconsin, UCSF, LICR, BioWa, Lonza, and Sanofi. These licenses impose various commercial,
contingent payment, royalty, insurance, indemnification, and other obligations on us. If we fail to comply with these obligations, the licensor may have the right to terminate the license, in which event we would lose valuable rights under our
collaboration agreements and our ability to develop product candidates.

We may be subject to claims that our
consultants or independent contractors have wrongfully used or disclosed alleged trade secrets of their other clients or former employers to us.

As is common in the biotechnology and pharmaceutical industry, we engage the services of consultants to assist us in the development of our product candidates. Many of these consultants were previously
employed at, or may have previously or may be currently providing consulting services to, other biotechnology or pharmaceutical companies including our competitors or potential competitors. We may become subject to claims that our company or a
consultant inadvertently or otherwise used or disclosed trade secrets or other information proprietary to their former employers or their former or current clients. Litigation may be necessary to defend against these claims. Even if we are
successful in defending against these claims, litigation could result in substantial costs and be a distraction to our management team.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our product candidates.

As is the case with other biopharmaceutical companies, our success is heavily dependent on intellectual property, particularly patents.
Obtaining and enforcing patents in the biopharmaceutical industry involve technological and legal complexity. Therefore, obtaining and enforcing biopharmaceutical patents is costly, time consuming, and inherently uncertain. In addition, Congress may
pass patent reform legislation. The Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations.
In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress,
the federal courts, and the USPTO, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents we might obtain in the future.

We may not be able to protect our intellectual property rights throughout the world.

Filing, prosecuting and defending patents on product candidates in all countries throughout the world would be
prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property
rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made
using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and further, may export otherwise infringing
products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our product candidates and our patents or other intellectual property rights may not be effective
or sufficient to prevent them from competing.

Many companies have encountered significant problems in protecting and
defending intellectual property rights in foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and other intellectual property protection, particularly
those relating to biopharmaceuticals, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. Proceedings to enforce our patent rights in
foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not
issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our
intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.

Risks Related to Our Common Stock

We have identified a material
weakness in our internal control over financial reporting. If we fail to remediate this material weakness and implement and maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and
timely financial statements could be impaired, which could harm our operating results, investors views of us and, as a result, the value of our common stock.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related rules, our management is required to report upon the effectiveness of our internal control over financial reporting in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2013. When and if we are a large accelerated filer or an accelerated filer and are no longer an emerging growth company, each as defined in the
Securities Exchange Act of 1934, as amended (the Exchange Act), our independent registered public accounting firm will also be required to attest to the effectiveness of our internal control over financial reporting. However, for so long as we
remain an emerging growth company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to public companies that are not emerging growth companies, including, but not limited to, not being
required to comply with the auditor attestation requirements of Section 404. Once we are no longer an emerging growth company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to
include an opinion from our independent registered public accounting firm on the effectiveness of our internal controls over financial reporting.

The rules governing the standards that must be met for management to assess our internal
control over financial reporting are complex and require significant documentation, testing, and possible remediation. To comply with the requirements of being a reporting company under the Exchange Act, we need to upgrade our systems including
information technology; implement additional financial and management controls, reporting systems, and procedures; and hire additional accounting and finance staff. Historically we have not had sufficient accounting and supervisory personnel with
the appropriate level of technical accounting experience and training necessary or adequate formally documented accounting policies and procedures to support effective internal controls. We have commenced the costly and time consuming process of
formally documenting, reviewing, and improving our internal controls over financial reporting and have made efforts to improve our internal controls and accounting policies and procedures, including hiring new accounting personnel and engaging
external temporary resources. However, in future periods, we may identify additional deficiencies and weaknesses or fail to remediate previously identified deficiencies in our internal controls.

We identified a material weakness in the operation of our internal controls over financial reporting as of December 31, 2012 and
March 31, 2013. A material weakness is a control deficiency, or combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented
or detected. The material weakness relates to the completeness and accuracy of clinical trial expenses. We have commenced efforts to remediate this material weakness through process and internal control improvements. However, if we cannot correct
the material weakness we have identified prior to the end of fiscal year 2013, or if we experience other problems that prevent the favorable assessment of the effectiveness of our internal control over financial reporting as of December 31,
2013, or if our independent registered public accounting firm issues an adverse opinion on internal control over financial reporting, investor confidence and our stock price could be adversely affected. Further, if material weaknesses or
deficiencies in our internal controls exist and go undetected, our financial statements could contain material misstatements that, when discovered in the future, could cause us to fail to meet our future reporting obligations and cause the price of
our common stock to decline.

Our stock price is volatile and purchasers of our common stock could incur substantial
losses.

Our stock price is volatile and from January 31, 2013, the first day of trading of our common stock, to
May 3, 2013, our stock had high and low sales prices in the range of $8.00 to $5.80 per share. The market price of our common stock may fluctuate significantly in response to a number of factors. These factors include those discussed in this
Risk Factors section of this report and others such as:



delay or failure in initiating or completing preclinical studies or clinical trials, or unsatisfactory results of these trials;



announcements about us or about our competitors including clinical trial results, regulatory approvals, or new product candidate introductions;

litigation and other developments relating to our patents or other proprietary rights or those of our competitors;



conditions in the pharmaceutical or biotechnology industries and the economy as a whole;



governmental regulation and legislation;



recruitment or departure of members of our board of directors, management team or other key personnel;



changes in our operating results;



the financial projections we may provide to the public, any changes in these projections, our failure to meet these projections, or changes in
recommendations by any securities analysts that elect to follow our common stock;

sales or potential sales of substantial amounts of our common stock; and



price and volume fluctuations in the overall stock market or resulting from inconsistent trading volume levels of our shares.

In recent years, the stock market in general, and the market for pharmaceutical and biotechnological
companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to changes in the operating performance of the companies whose stock is experiencing those price and volume
fluctuations. Broad market and industry factors may seriously affect the market price of our common stock, regardless of our actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly
following our initial public offering.

Raising additional funds by issuing securities or through licensing or lending
arrangements may cause dilution to our existing stockholders, restrict our operations or require us to relinquish proprietary rights.

To the extent that we raise additional capital by issuing equity securities, the share ownership of existing stockholders will be diluted. Any future debt financing may involve covenants that restrict our
operations, including, among other restrictions, limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments, and engage in certain merger, consolidation, or asset sale transactions. In
addition, if we raise additional funds through licensing arrangements, it may be necessary to relinquish potentially valuable rights to our product candidates or grant licenses on terms that are not favorable to us.

No public market for our common stock existed prior to our initial public offering, and an active trading market may not develop or
be sustained following our initial public offering.

Prior to our initial public offering in February 2013, there was
no public market for our common stock. An active trading market may not develop following our initial public offering or, if developed, may not be sustained. The lack of an active market may impair your ability to sell your shares at the time you
wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by
selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

Substantial future sales of shares by existing stockholders, or the perception that such sales may occur, could cause our stock
price to decline.

If our existing stockholders, particularly our directors and executive officers and the venture
capital funds affiliated with our current and former directors, sell substantial amounts of our common stock in the public market, or are perceived by the public market as intending to sell substantial amounts of our common stock, the trading price
of our common stock could decline significantly. As of May 3, 2013, we had 24,177,506 shares of common stock outstanding. Of these shares, 14,697,573 shares are currently subject to contractual lock-up agreements entered into by certain of our
stockholders with the underwriters in connection with our initial public offering and will become freely tradable on July 30, 2013, subject to extension or reduction. Upon the expiration of these restrictions contained in these contractual
lock-up agreements, except for shares of common stock held by directors, executive officers and our other affiliates, which will be subject to volume limitations under Rule 144 of the Securities Act of 1933, as amended.

Some of our existing security holders have demand and piggyback rights to require us to register with the SEC up to 13,408,735 shares of
our common stock, subject to expiration of the contractual lock-up agreements. If we register these shares of common stock, the stockholders would be able to sell those shares freely in the public market, subject to Rule 144 transfer restrictions
applicable to affiliates.

We also registered 3,205,899 shares of our common stock that we may issue under our equity plans.
Once we issue these shares, they can be freely sold in the public market upon issuance, subject to any vesting restriction, contractual lock-up agreements, or Rule 144 transfer restrictions applicable to affiliates.

If securities analysts do not publish research or publish unfavorable research about
our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in
part on the research and reports that securities and industry analysts publish about us or our business. If one or more of the analysts who covers us downgrades our stock or publishes unfavorable research about our business, or if our clinical
trials or operating results fail to meet the analysts expectations, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could
decrease, which could cause our stock price and trading volume to decline.

Requirements associated with being a public
reporting company will continue to increase our costs significantly, as well as divert significant company resources and management attention.

We have only been subject to the reporting requirements of the Exchange Act and the other rules and regulations of the Securities and Exchange Commission (SEC) since August 2012. We are working with our
legal, independent accounting, and financial advisors to identify those areas in which changes should be made to our financial and management control systems to manage our growth and our obligations as a public reporting company. These areas include
corporate governance, corporate control, disclosure controls and procedures, and financial reporting and accounting systems. We have made, and will continue to make, changes in these and other areas. Compliance with the various reporting and other
requirements applicable to public reporting companies will require considerable time, attention of management, and financial resources. In addition, the changes we make may not be sufficient to allow us to satisfy our obligations as a public
reporting company on a timely basis.

Further, the listing requirements of The NASDAQ Global Market require that we satisfy
certain corporate governance requirements relating to director independence, distributing annual and interim reports, stockholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of conduct. Our management and
other personnel will need to devote a substantial amount of time to ensure that we comply with all of these requirements. Moreover, the reporting requirements, rules and regulations will increase our legal and financial compliance costs and will
make some activities more time-consuming and costly. These reporting requirements, rules and regulations, coupled with the increase in potential litigation exposure associated with being a public company, could also make it more difficult for us to
attract and retain qualified persons to serve on our board of directors or board committees or to serve as executive officers, or to obtain certain types of insurance, including directors and officers insurance, on acceptable terms.

In addition, being a public company could make it more difficult or more costly for us to obtain certain types of insurance,
including directors and officers liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also
make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

Any changes we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.

We have never paid and do not intend to pay cash dividends and, consequently, your ability to achieve a return on your investment
in our common stock will depend on appreciation in the price of our common stock.

We have never paid cash dividends on
any of our capital stock, and we currently intend to retain future earnings, if any, to fund the development and growth of our business. Additionally, our loan and security agreement with MidCap Financial contains covenants that restrict our ability
to pay dividends. Therefore, you are not likely to receive any dividends on our common stock for the foreseeable future. Since we do not intend to pay

dividends, your ability to receive a return on an investment in our common stock will depend on any future appreciation in the market value of our common stock. There is no guarantee that our
common stock will appreciate or even maintain the price at which you purchased it.

Our principal stockholders and
management own a significant percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Our directors, executive officers, and the holders of more than 5% of our common stock together with their affiliates beneficially own approximately 68% of our common stock. These stockholders, acting
together, may be able to determine all matters requiring stockholder approval. For example, these stockholders may be able to control elections of directors, amendments of our organizational documents, or approval of any merger, sale of assets, or
other major corporate transaction. This may prevent or discourage unsolicited acquisition proposals or offers for our common stock that you may feel are in your best interest as one of our stockholders.

As a newly public company, our stock price may be volatile, and securities class action litigation has often been instituted
against companies following periods of volatility of their stock price. Any such litigation, if instituted against us, could result in substantial costs and a diversion of our managements attention and resources.

In the past, following periods of volatility in the overall market and the market price of a particular companys securities,
securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our managements attention and resources.

Anti-takeover provisions in our development agreement with Sanofi, as well as in our charter documents and Delaware law, could
discourage, delay, or prevent a change in control of our company and may affect the trading price of our common stock.

Under our license and collaboration agreement with Sanofi, in the event we are acquired by a top 25 pharmaceutical company based on market
capitalization at the time of such acquisition, Sanofi has the option to exclusively develop and commercialize licensed products to treat Pa-infected patients with CF or bronchiectasis patients worldwide, which would limit the amount of
revenue we could generate from the commercialization of those licensed products to the amounts Sanofi would be required to pay pursuant to their agreement with us. In addition, our agreement with Sanofi prohibits us or an acquiror of us from
developing or commercializing any other anti-Pa antibody except with respect to any anti-Pa antibody of the acquiror existing on the date of acquisition and developed thereafter. Accordingly, these provisions may discourage or prevent
certain pharmaceutical companies from seeking to acquire us.

In addition, we are a Delaware corporation and the anti-takeover
provisions of the Delaware General Corporation Law may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an
interested stockholder, even if a change in control would be beneficial to our existing stockholders.

Our amended and
restated certificate of incorporation and amended and restated bylaws may discourage, delay, or prevent a change in our management or control over us that stockholders may consider favorable. Our amended and restated certificate of incorporation and
amended and restated bylaws:



provide that vacancies on our board of directors, including newly created directorships, may be filled only by a majority vote of directors then in
office;



do not provide stockholders with the ability to cumulate their votes; and

We are an emerging growth company and the extended transition period for complying
with new or revised financial accounting standards and reduced disclosure and governance requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards
until such time as those standards apply to private companies. We plan to avail ourselves of this exemption from new or revised accounting standards and, therefore, we may not be subject to the same new or revised accounting standards as other
public companies that are not emerging growth companies.

For as long as we continue to be an emerging growth company, we also
intend to take advantage of certain other exemptions from various reporting requirements that are applicable to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation and any golden parachute payments not previously approved, exemption from the requirement of auditor
attestation in the assessment of our internal control over financial reporting and exemption from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the
auditors report providing additional information about the audit and the financial statements (auditor discussion and analysis). If we do, the information that we provide stockholders may be different than what is available with respect to
other public companies.

Investors could find our common stock less attractive because we will rely on these exemptions, which
may make it more difficult for investors to compare our business with other companies in our industry. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock
price may be more volatile. In addition, it may be difficult for us to raise additional capital as and when we need it. If we are unable to do so, our financial condition and results of operations could be materially and adversely affected.

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year in which the market value
of our common stock that is held by non-affiliates exceeds $700 million as of the end of the second fiscal quarter, (ii) the end of the fiscal year in which we have total annual gross revenue of $1 billion or more during such fiscal year,
(iii) the date on which we issue more than $1 billion in non-convertible debt in a threeyear period or (iv) December 31, 2017, the end of the fiscal year following the fifth anniversary of the first sale of our common equity
securities pursuant to an effective registration statement filed under the Securities Act.

On
January 31, 2013, our registration statement on Form S-1 (File No. 333-184299), as amended, was declared effective by the SEC for our initial public offering, or IPO. Pursuant to the Registration Statement, we registered the offer and
sale of 9,487,500 shares of our common stock with an aggregate offering price of approximately $85.0 million. We sold and issued 8,750,000 shares of our common stock at a price to the public of $8.00 per share for an aggregate offering price of
approximately $70.0 million. Leerink Swann acted as the sole book running managers for the offering, and William Blair and Needham & Company acted as co-managers for the offering. After deducting underwriting discounts,
commissions and offering expenses paid or payable by us of approximately $8.5 million, the net proceeds from the offering were approximately $61.5 million. No offering expenses were paid or are payable, directly or indirectly, to our directors or
officers, to persons owning ten percent or more of any class of equity securities, or to their associates, or to any of our affiliates. The offering commenced on January 31, 2013 and closed on February 5, 2013.

There has been no material change in the expected use of the net proceeds from our initial public offering from that described in the
final prospectus filed with the SEC pursuant to Rule 424(b) on January 31, 2013.

Item 3.

Defaults Upon Senior Securities

Not Applicable.

Item 4.

Mine Safety Disclosures

Not Applicable.

Item 5.

Other Information

As
part of the our annual compensation cycle for 2013, the compensation committee of our board of directors, at its meeting on April 30, 2013, approved for our Chief Executive Officer, David W. Pritchard, an increase in annual base salary of
$90,000 to $440,000 and an increase in target bonus from 40% to 50% of his base salary.

Item 6.

Exhibits

A list of
exhibits is set forth on the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q, and is incorporated herein by reference.

Letter Agreement, dated July 5, 2012, by and between the Registrant and Jeffrey H. Cooper.

10.4(4)

Termination Agreement and Waiver, dated October 5, 2012, by and among KaloBios Pharmceuticals, Inc. and the other parties thereto.

31.1

Certification of Chief Executive Officer of the Registrant, as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer of the Registrant, as required by Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.

32.1*

Certification by the Chief Executive Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the United States Code (18 U.S.C.
§1350).

32.2*

Certification by the Chief Financial Officer, as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 36 of Title 18 of the United States Code (18 U.S.C.
§1350).

101.INS**

XBRL Instance Document

101.SCH**

XBRL Taxonomy Extension Schema Document

101.CAL**

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**

XBRL Taxonomy Extension Label Linkbase Document

101.PRE**

XBRL Taxonomy Extension Presentation Linkbase Document

(1)

Filed as an exhibit to Registrants Registration Statement on Form 10-12G (File No. 000-54735), filed on June 12, 2012 and incorporated herein by reference.

(2)

Filed as an exhibit to Registrants Current Report on Form 8-K (File No. 000-54735) filed on March 7, 2012.

(3)

Filed as an exhibit to Amendment No. 2 to the Registrants Registration Statement on Form 10-12G (File No. 000-54735) filed on August 7, 2012.

(4)

Filed as an exhibit to Registrants Current Report on Form 8-K (File No. 000-54735) filed on October 12, 2012.

*

The Certifications attached as Exhibits 32.1 and 32.2 that accompanies this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange
Commission and are not to be incorporated by reference into any filing of KaloBios Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this
Form 10-Q, irrespective of any general incorporation language contained in such filing.

**

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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